THE SPEECH
BERNANKE'S CONCLUSION:
What implications does the pickup in labor costs have for price inflation? One possible outcome is that increases in labor costs will largely be absorbed by a narrowing of firms' profit margins and not be passed on to consumers in the form of higher prices. The fact that the average markup of prices over unit labor costs is currently high by historical standards suggests some scope for this outcome to occur. If higher labor costs are mostly absorbed by firms and not passed on, then workers will see the gains in their nominal compensation per hour of work translated into greater real compensation per hour; in the process, workers would capture a greater share of the fruits of the high rate of productivity growth seen in recent years. The more worrisome possibility is that tight product markets might allow firms to pass all or part of their higher labor costs through to prices, adding to inflation pressures. The data on costs, margins, and prices in coming months may shed some light on which of these two scenarios is likely to be the better description of events.
During the early part of this decade, the Federal Reserve sharply eased the stance of monetary policy to help bring the economy out of recession and to foster a durable economic expansion. Once the expansion had clearly gained firm footing, the FOMC began a process of normalizing interest rates that involved seventeen consecutive increases in overnight rates of 25 basis points each. In August of this year, and again in September and October, the Committee left interest rates unchanged so as to assess the effects of its previous policy actions, and because of indications that economic growth was moderating and that inflation pressures might be diminishing somewhat. At the same time, the Committee has continued to emphasize the upside risks to inflation and the high costs that would be associated with a failure of inflation to moderate gradually as expected. Needless to say, we will continue to monitor the inflation situation closely. Whether further policy action against inflation will be required depends on the incoming data and in particular on how these data affect the FOMC's medium-term forecasts of both inflation and output growth.
