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.

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.

(**) Money Morning editors reserve the right to edit responses for grammar, length and clarity when posting on our Website. Please include your name and hometown with your email.

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  1. Priscilla C. | April 29, 2011

    Hang on, folks… we're heading back to the horse and buggy days. But we will have neither horses nor buggies to help us survive. When an "advanced" civilization collapses, living conditions fall like a tsunami struck building.

    No longer do our people know how to survive without toys and convenience.

    May God have mercy on us.

  2. jj | April 29, 2011

    Pretty amazing how Bernanke dismisses inflation.Isn't he with the Obama administration on wanting a lower Dollar/higher Chinese Yuan?Do you know what will happen to the prices of all kinds of things we buy,that mostly are produced in China,if the Yuan should rise 20% against the Dollar?Today's 9%(honest inflation number) inflation will look low by comparison.

  3. Theo Müller | April 29, 2011

    Theo Müller | April 29, 2011
    False People!
    What was Hitler – he also led the folk into total collaps! Why do Americans allow to be treated like that – it is a Maffia style – the way the government is dealing with the US finances!
    Why are they wasting so much of mony and lifes for muslim countries?
    Have you ever seen an islamic government giving a cent to a non muslim?
    The great " human rights fantasts" are screeming for religious freedom! But when do you all realize that Islam is not a religion at all – it is an evil cult – evil cults must be prohibited by law-rtight! But in the USA it seems that even worst fanatic islamic psychopaths can preach – stirup their, from childhood onwards manipulated devils for suicide bastards!
    Get clear with such politicians – get rid of them – if they learn about this – they will start walking straight. But it needs a sound group of people who really care and speak up – and get the errant politician redhanded – Americans be brave, you can do better – you are great – don't any longer be fooled by such miserable dirty usless criminals.
    Again it's me – Theo the good hearted man who's heart hurts to see when the folk of USA is cheated. We Swiss, we know how to take care of our currency – but USA is offroad – lost the way – blind politicians – baboons – are better – they woun't cause inflation- the most flatulation-ha-ha
    Maybe one day I should come to the USA and have a great speach – to make things happen. To chear up the cheated people.
    Kind regards from
    Theo Müller the very straight achiever!
    For anyone who is interested in more coments- just contact me:
    theophilmueller@gmail.com

  4. Francis Bart Bertholic Jr | April 30, 2011

    Inflation is going to be with us for quite sometime

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