Finance

Inflation Fears on Fed’s Radar

Written by Gaurav Bhola, MSM, Managing Editor & Community Manager on July 18, 2007 2:26 pm EST

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The Chairman of the Federal Reserve Ben Bernanke fears that inflation might flare up in the near future. He is expected to convey his concerns to the House of Representatives’ Financial Services Committee on Wednesday. He will also address the Senate Banking Committee regarding his assessment. Bernanke will present two days of the central bank’s monetary policy report which is part of a twice-yearly ritual of testimony before Congress.

The report is a critical forecast of the nation’s inflation, unemployment, and growth figures. It is surprising that even the precipitous increase in consumer and oil prices in the last few years has not prompted either a recession or high inflation. According to the Labor Department consumer prices rose 2.7 percent during the 12 months ending in May.

The 1970s steep hikes in oil pooled with presumption of high inflation fueled double-digit consumer price increases and sluggish economic growth. Also, the 1979 Iranian revolution sent oil prices soaring with inflation of 13.5 percent in 1980. These expectations of impending inflation can cause havoc with an economy.

For the Fed the next couple of years will be important with regards to keeping high inflation at bay. They are ready to meet any challenges especially after having core inflation slide for the third straight month in May to 1.9 percent. The Chairman would be content if inflation lowered further and stayed low for a while.

Preferably, the Fed would like to see consumer and business inflation anticipation to be deflated because these expectations may become self-fulfilling. If inflation anticipation is steady then it wont be affected by causes such as pendulating oil prices, employment news, economic highs and lows or other facets of a vibrant economy. Herein, if consumers anticipate prices are on the rise, they are more apt to pay higher prices; if businesses anticipate inflation to go up, they may be faster to increase prices to cover costs.

The Fed believes that inflation expectations have a direct impact on actual inflation, thus the Feds ability to attain price stability. It is a constant struggle for the Fed to determine what leads to inflation expectations and how that influences businesses’ price-setting decisions.

Bernanke believes the Feds ability to foretell inflation and envisage how inflation will react to policy is contingent upon the Feds ability to measure and comprehend what determines the public’ outlook of inflation.

However, the growth outlook for the economy is of critical importance. It is most likely we will have marginal growth next year. Fortunately, the housing arena has not had much impact on the collective economy which may change in the future.

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