Bernanke Says Inflation Is ‘Significant Concern’
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The chairman of the Federal Reserve, Ben Bernanke, said while rising public expectations for inflation are a “significant concern,” there’s little sign of the pressures that drove price increases above 10% in the 1970s.
“Some indicators of longer-term inflation expectations have risen in recent months, which is a significant concern” for the Fed, Mr. Bernanke said yesterday in a speech during a Class Day ceremony at Harvard University in Cambridge, Mass. Policy makers “need to monitor that situation closely.”
Signs of increasing prices compelled Mr. Bernanke and other Fed policy makers to signal in April they’ll pause after reducing the benchmark interest rate by 3.25 percentage points since September. The Fed is trying to sustain economic growth and minimize harm from the collapse of the subprime mortgage market without impairing its credibility on inflation.
Mr. Bernanke’s remarks focused on the differences between the American economy now and in the 1970s. The combination of a housing slump and slow growth along with surging food and energy costs has prompted economists to resurrect the term “stagflation,” first used in the 1960s to describe a mix of slow growth and rising prices.
“The Fed’s dilemma is obvious and there’s a lot at stake,” the chief economist at Bank of America Corp. in New York, Mickey Levy, said. “To be consistent with its long-run inflation objectives, the Fed must eventually raise” the real funds rate to at least 2%, he said.
Mr. Bernanke didn’t comment on the outlook for monetary policy in his remarks. Traders anticipate the central bank will keep its benchmark rate at 2% at the next meeting on June 24-25, futures prices show.
“Maintaining confidence in the Fed’s commitment to price stability remains a top priority,” Mr. Bernanke said. “We see little indication today of the beginnings of a 1970s-style wage-price spiral.”
The consumer price index rose 3.9% for the year ending April, and expectations of inflation five years from now rose to 3.4% in May versus 3% in January, according to the Reuters/University of Michigan Survey.
“The overall inflation rate has averaged about 3.5% over the past four quarters, significantly higher than we would like but much less than the double-digit rates that inflation reached in the mid-1970s,” Mr. Bernanke said.
