The economic expansion in the United States became increasingly well established in the first half of 2004, but the pace of inflation picked up from its very low rate in 2003. At the time of the February Monetary Policy Report to the Congress, considerable evidence suggested that the U.S. economy had moved into a period of more-vigorous expansion. Nonetheless, some businesses remained cautious about hiring and investment. In the event, businesses stepped up their hiring in the spring, and capital spending seems to have continued apace.> Over the first half of this year, energy prices soared, and inflation in core consumer prices increased. To some extent, the upturn in core inflation reflected the indirect effects of higher energy prices. In addition, strengthening aggregate demand worldwide induced a surge in the prices of many primary commodities and industrial materials, and the decline in the dollar in 2003 put upward pressure on import prices. In this environment, firms were better able to pass on the higher costs of imports, raise the prices of domestically produced items that compete with imports, and in many cases boost their profit margins.> Monetary policy was very accommodative at the start of 2004 as the Federal Open Market Committee (FOMC) sought to provide continuing support to the economic expansion. Following some upbeat labor market reports, solid growth in output, and a pickup in core consumer price inflation, the FOMC announced at its May meeting that it believed that the monetary policy accommodation then in place could be "removed at a pace that is likely to be measured." At its June meeting, the FOMC decided to begin moving the federal funds rate back toward a more neutral setting.> Although some of the recent data have been on the soft side, the available information on the outlook for the U.S. economy is, on balance, positive. The prospects also seem favorable for inflation to remain contained in the period ahead.
