Nation Is at Risk of Cycle Of Inflation, Bernanke Says

WASHINGTON — Prices have been soaring long enough and fast enough, economists say, that the nation is at risk of a self-reinforcing cycle of inflation like that experienced in the 1970s.It is a risk Chairman Bernanke highlighted in a speech yesterday, saying that the falling value of the dollar can feed into inflation expectations, and that rapid price escalation, if sustained, “might lead the public to expect higher long-term inflation rates, an expectation that ultimately could become self-confirming.”For some businesses that already is the reality. Many companies making long-term investments are assuming that prices will rise at a pace well above that of the past 20 years, as they pencil in larger price increases for the supplies they buy and the prices they charge. Consumers are coming to take rapidly escalating food and energy prices for granted. And labor unions are starting to push harder for across-the-board wage increases, though overall wages are still climbing slowly.American consumers expect prices to rise 7.7% in the coming year, according to the Conference Board, a research company. Investors expect inflation over the coming decade to average 3.4% based on bond market data analyzed by the Cleveland Fed. That is well above the Fed’s unofficial target of about 2%.When the price of food or gasoline goes up, economists generally think of it as a one-time bump. For the past four years, it hasn’t been. The last time there were sharp and sustained increases in those prices, in the 1970s, a wage and price spiral developed that was so severe that the Fed had to engineer the deepest downturn since the Great Depression to end it.“We’re at the edge of the cliff right now,” a senior economist at Wells Fargo, Scott Anderson, said. “It’s still at an embryonic stage, like where we were in 1973 or 1974, not as bad as things were in 1979. But it could move in that direction if the Fed isn’t aggressive.”Ordinary businesspeople, especially those in industries in which energy costs figure heavily, are responding as if that is the direction the economy is heading.“We are assuming that prices will continue to go up, not that they’re going to level off anytime soon,” the president of Manko Delivery Systems, a Tampa company that offers ground freight, logistics, and other services, John Benko, said. His company has been able to pass on about three-quarters of the higher fuel costs to customers in the form of higher prices, with the rest cutting into his firm’s profit.Ryder System has reduced the maximum speed on its fleet of trucks to 63 miles a hour, from 65, and many of its clients are making fewer shipments of goods with fuller trucks.But these decisions are a logical response to higher fuel prices — not necessarily signs that expectations for future inflation are coming unhinged. The best way to get a sense of those long-term expectations is through what executives assume as they make longer-term choices.If a manufacturer expects energy prices to keep rising, it would be more inclined to pay extra for a more efficient machine, or choose to set up many small warehouses close to customers rather than one massive one that is far away.That’s what’s happening, a general manager for Ryder. Thomas Jones, said. “People are assuming prices have got nowhere to go but up,” he said.“Almost unilaterally our customers are expecting prices to continue rising,” a vice president of Countermind, a Colorado firm that sells technology to help shipping firms plan their routes more efficiently — an investment that offers a higher payoff when gasoline prices rise, Bob Strle, said.The big question is whether those expectations of higher fuel prices feed into a wage and price spiral like that of the 1970s, in which workers demanded — and received — double-digit wage increases to keep up with higher prices, which then fueled further inflation.There are huge differences between now and the 1970s. In the past year, the average weekly wage for private sector non-managerial workers rose only 1.9%. A soft American economy could continue to leave workers little leverage with which to demand pay hikes to match higher prices.Moreover, fewer workers are unionized, fewer of those have automatic cost-of-living adjustments, and unions have less clout with which to negotiate wage increases. Finally, many of the most heavily unionized industries, such as the automakers, are in such dire financial straits that raises of any sort are unlikely.“There is no evidence that wages have started to spiral up,” the president of the Federal Reserve Bank of San Francisco, Janet Yellen, said in a recent speech.

Nation Is at Risk of Cycle Of Inflation, Bernanke Says

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