Fed chief sees no repeat of 1970s inflation

Fed chief sees no repeat of 1970s inflation

 

CAMBRIDGE (MASSACHUSETTS) – UNITED States Federal Reserve chairman Ben Bernanke said rising long-term inflation expectations were a ‘significant concern’ for policymakers, but dismissed worries that a wage-price spiral was developing.

 

‘Some indicators of longer-term inflation expectations have risen in recent months, which is a significant concern for the Federal Reserve,’ he told graduating students at Harvard University on Wednesday.

 

He described overall inflation as ‘significantly higher than we would like’, the second straight day he had sounded a warning on inflation, which financial markets took as a firm signal that interest rates were likely to be on hold for some time.

 

Nonetheless, Mr Bernanke said he saw no sign that a ‘1970s-style wage-price spiral, in which wages and prices chased each other ever upward’ might be starting.

 

While inflation has averaged 3.5 per cent over the past four quarters, that was much less than rates reached in the 1970s and again in 1980.

 

Analysts said the tone of his remarks indicated that the Fed was firmly focused on inflation risks and was unlikely to ease rates.

 

‘I’m not saying that he will not lower rates even if the economy falters severely, but he’s certainly suggesting that inflation is of equal importance,’ said Mr John McCarthy, the director of foreign exchange at ING Capital Markets in New York.

 

Bond prices dropped after Mr Bernanke’s remarks were published, as investors bet it reduced chances of more rate cuts, but the US dollar’s value rose. Stock prices also fell on the fresh expression of concern about inflation.

 

Mr Bernanke said soaring oil prices have had a ‘relatively muted’ impact so far because the amount of energy used to produce a given amount of output – energy intensity – has fallen markedly since the 1970s.

 

But he also said policymakers had learnt a lesson in the 1970s, in particular, that they must keep long-term inflation expectations anchored to achieve low and stable inflation.

 

‘If people expect an increase in inflation to be temporary and do not build it into their long-term plans for setting wages and prices, then the inflation created by a shock to oil prices will tend to fade relatively quickly.’

 

REUTERS

 

Source: Straits Times

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