The trajectory that emerges from this forecast is one in which inflation is temporarily high in the current quarter but quickly approaches the current estimate of long-run inflation of 2.5 percent.

Nevertheless, many business firms indicated to the District Banks that they expect high prices for energy and construction materials to persist,

point to recession in both the manufacturing sector and the general economy.

If they tighten again in November, then the steps they’ve taken in three (interest rate) moves should meaningfully diminish the chances of inflation picking up going forward.

Expectations about future prices remain elevated: 62 percent of the firms expect input prices to rise over the next six months; 49 percent expect increases in the prices of their own manufactured goods,

These forecasts are higher than in the previous survey, particularly for the first half of 2006, suggesting increasing optimism among the forecasters.

Higher prices for final manufactured goods were also more widespread this month, suggesting that higher costs have been passed on to customers.

The employment index was sharply higher this month, and the average hours worked improved. Firms continued to report higher prices for inputs and for their own manufactured goods.

Price pressures remain but continue to show a moderating trend.