U.S. Consumers Stumble Over Bernanke's "Transitory Inflation" Claim

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In the first-ever press conference by the U.S. Federal Reserve, Fed Chairman Ben Bernanke tackled a handful of eager reporter questions about why he continues to think rising inflation does not warrant a change in interest rates.

The Fed announced Wednesday after a two-day meeting of the Federal Open Market Committee (FOMC) that it would keep its record-low interest rates between 0.00% and 0.25% "for an extended period."

Bernanke stressed to reporters that "longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued," and Fed policies would keep "transitory inflation" under control.

Latest Comment

Inflation is going to be with us for quite sometime…

Many readers wrote into the Money Morning Mailbag with their inflation concerns. Their households are hurting from rising prices and they are frustrated that the Fed continues to dismiss the inflationary impact on the U.S. economy.

The following letter was sent in from a former government employee who questions the accountability of government-reported inflation data.

Inflation numbers are like scores in a beauty pageant - highly subjective and capable of being manipulated.

To begin with, as a former government employee I find any numbers or stats created and provided by the government or its agencies suspect. And the proof of the pudding is in the eating, to quote an old phrase.

The adjustments to my work pension are based on the national rate of inflation which in no way resembles the rate of inflation number used by the municipal government for property taxes or increases in the cost of utilities. If anything can be concluded from the above example, the variation in percentages only fuels the rate of inflation. And when one throws the escalating costs of gasoline, food, drugs and healthcare into the mix the final tally is as accurate as the unemployment or mortgage default rates. Perhaps, as with political polls, inflation numbers should include a 'margin of error' percentage as a disclaimer.

--S.M.

The Fed uses the consumer price index (CPI) excluding food and fuel prices, known as "core" inflation, as a benchmark barometer of inflation.

Core inflation was up 1.2% in March from a year before, but with food and fuel prices, the CPI in March rose 2.7% from a year ago.

The Fed also looks at the core Personal Consumption Expenditure (PCE) deflator, which measures the average increase in prices for domestic personal consumption excluding food and energy prices. The core PCE deflator was up 0.9% in February from a year before, and the overall PCE deflator was up 1.6%. Numbers for March will be released today.

In economic projections released at the conference, the Fed raised its 2011inflation outlook to 2.1% to 2.8% from its January prediction of 1.3% to 1.7%. It expects inflation to fall to 1.2% to 2.0% in 2012, and to remain at 1.4% to 2.0% in 2013.

Bernanke acknowledged that escalating prices of oil, energy and other commodities have recently pushed up inflation, but reiterated that those increases aren't expected to translate into "core" inflation over the long haul.



But some economists say that Bernanke shouldn't dismiss this gradual rise as "transitory."

"What one should be seeing at this point is not just low core inflation but declining inflation - deflation - and yet what we're seeing is actually a gradual rise, and inflation expectations have been rising for the past six months," economist Edward Hadas told The Financial Times.

Hadas also thinks that Bernanke's mention of higher prices is a sign he's slightly concerned.

"Even Bernanke had to admit higher fuel prices were starting to get into people's minds, slowing down economic activity and also putting price pressure up," said Hadas. "And he's getting a little bit more worried about inflation."

But not worried enough to indicate any changes in monetary policy.

The inflationary impact on the U.S. economy has been a hot topic as the more-hawkish Fed regional bank presidents have said policy changes might be necessary to control rising prices, but Wednesday's FOMC decision to keep rates low was unanimous.

The Fed's refusal to raise rates comes when the European Central Bank (ECB) and central banks in many emerging economies are hiking theirs to curb inflation. China raised rates April 5 for the fourth time in six months, and the ECB followed suit on April 7.

The Fed cites low wage gains as a sign inflation will remain subdued. Average hourly earnings (adjusted for inflation) fell 1% in March from a year prior. Workers don't have increased salary expectations when unemployment is still high at 8.8%.

But Hadas says the Fed's decision to keep interest rates low will certainly exacerbate inflation issues in the U.S. economy.

"If you think that 70% of the world's GDP comes from countries with negative real interest rates it's hardly a surprise that you're starting to see rising asset prices," said Hadas. "So I think inflationary pressure is here and the longer the Fed denies that it plays a role, then the more imbedded it's likely to be."

Even though the central bank seemed unworried about inflation, investors acted otherwise after Bernanke spoke and pushed up inflation-hedge investments gold and silver. Gold rose $13.60 an ounce, and closed at $1,517.10. Silver climbed 90.8 cents and ended the day at $45.958 an ounce.

Money Morning Contributing Editor Martin Hutchinson said the Fed's lack of action could create an inflationary environment much worse than that of the 1970s, when inflation rose from 3.6% in 1973 to a year-over-year peak of 14.6% in 1980.

"If we take an honest look at fiscal and monetary policy, it's pretty clear that the odds favor an advance in inflationary statistics -- and not a retreat," said Hutchinson. "This will spark an inflation advance in import prices, consumer prices and, eventually, even Bernanke's beloved core-CPI and PCE indicators. This advance will take inflation up to its 1970s peak - and then beyond."

Hutchinson suggests investors protect their portfolios against Bernanke's inflation-friendly policies. Precious metals and countries with commodity-linked currencies are good options, while bonds should be avoided.

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