Federal Reserve Chariman Ben S. Bernanke gave testimony to congress yesterday, expressing that his major concern is fighting recession.  Inflation remains a major concern, as the recent readings for the CPI (consumer price index) and the PPI (producer price index) showed a higher increase than originally expected.  Chairman Bernanke noted that inflation is a cause for concern, however, recession is a greater concern at this point, and will be at the forefront of upcoming monetary policy decisions.

Bernanke stated, “A critical task for the Federal Reserve over the course of this year will be to assess whether the stance of monetary policy is properly calibrated to foster our mandated objectives of maximum employment and price stability in an environment of downside risks to growth, stressed financial conditions, and inflation pressures.”

The Chairman discussed the recent reports on inflation and noted, “Inflation could be lower than we anticipate if slower-than-expected global growth moderates the pressure on the prices of energy and other commodities or if rates of domestic resource utilization fall more than we currently expect.  Upside risks to the inflation projection are also present, however, including the possibilities that energy and food prices do not flatten out or that the pass-through to core prices from higher commodity prices and from the weaker dollar may be greater than we anticipate.”

He went on to say that if confidence in the ability of the FOMC to control inflation suffers with overall inflation highs persisting, it will “greatly complicate the task of sustaining price stability and could reduce the flexibility of the FOMC to counter shortfalls in growth in the future.”

As usual, Bernanke noted that the Fed will be closely monitoring inflation, but any actions necessary to spur economic growth will be taken.  That means if cutting rates will help economic growth, they are prepared to cut rates.  At this point, inflation is on the back-burner.  If and when the economy stabilizes, the Fed could begin to raise the rates and start to take more actions to calm the inflation situation.  It will take the better part of 2008 before we get to the point since, as Bernanke says, “Monetary policy works with a lag.”

The Department of Labor released the numbers for the producer price index (PPI) today.  The seasonally adjusted figure showed an increase of 1%.  This means that core inflation is actually higher than anticipated.

The producer price index is one of the major figures that the Department of Labor reports on a monthly basis.  The PPI is indicative of the rate of inflation.  If this number is rising, that means tat core inflation is rising.  This is bad new for consumers and investors.  Under normal circumstances, a rise in PPI would inspire interest rate increases, but considering overall economic slowdown, it is not likely that the Federal Reserve will choose to hike interest rates back up.

The report explains that energy prices are behind the sharp increase for January in finished goods.  It was noted, “The upturn in finished goods prices was led by the index for energy goods, which increased 1.5 percent in January after falling 3.0 percent in December.”

The core index rose 0.4%.  This figure does not include food and energy items.  The wholesale industry prices rose 1.5% in January.  That is up from a decrease of 3% in December.  Food prices rose 1.7%.  Gasoline prices elevated by 2.9%, and residential natural gas costs when up by 0.7%.

Inflation is also on the rise in the automotive, tobacco, pharmaceutical, and furniture industries.  Overall, pricing for raw materials, core crude goods, semi-processed goods, and intermediate goods all showed increases last month.  Prices have escalated 7.4% in the passed 12 months.

Back to back with disappointing CPI (consumer price index) news, the PPI numbers are causing stress in Wall Street. Inflation is worse than anticipated.  The room for even modest rate cuts at this point is narrowing for the Federal Open Market Committee.  It is doubtful that they will begin to raise rates.  Since they have less of a handle on inflation than anticipated, further rate cuts at the next meeting could be slim to none.  We certainly will not see any aggressive cuts like the ones we saw in January.  If prices continue to increase, consumer spending could plummet ever further.  Should that happen, the economy could slow down even further, or begin to retract.  If that happens, we will find ourselves in a full blown recession.

Consumer spending has declined significantly since the economy has been performing poorly. Disposable income is practically non-existent for many, particularly those who have had a difficult time keeping up with their mortgage payments. There are several little things that you can do in order to save some extra money to back up your income in case there are some expensive emergency situations.

Always, without fail, put a part of your paycheck into savings. You might put $100, $50, or $2, but the important thing is that you keep building your savings. Pay your savings account like a bill, and when things get a little tight, you will have some back up funds. Put the money into an investment or in an interest bearing savings account. Purpose not to touch the money unless you have a major emergency or will be late on an important bill. Make savings a priority.

Make sure that you are not paying for things that you are not using. Check your credit cards statements for subscription or membership fees. Are you using these services? If not, make sure that you get on the phone and cancel the repeating charge. Little fees add up. A small charge of $15 dollars a month adds up to $540 in just three years.

Cut back on impulse buys. You should shop on purpose, not by accident. Before you go out, survey what you think you might need or want and set a budget. Decide on a limit for how much you will spend on certain items, and make sure that you space out larger purchases so that you can pay one off before the next one is added on. Smaller purchases add up to, so make sure that you had the intention to purchase the item you are looking at in the store. If you didn’t plan for it, don’t pick it up. If you really need it or really want it, you will come back for it. You should also do your homework and check the internet for the best prices on the items you are looking to buy. Take advantage of sales as well.

Pay debts faster than you have to. Interest savings can truly add up as well, if you pay your debts ahead. Always pay more than the minimum on your credit cards, and if you have a mortgage, try to pay a little more towards the principle each month than required. Getting out of debt sooner is the best way to save money. Why pay extra so you can pay slowly if you don’t have to? If you have multiple loans and credit card bills, consolidate them into one payment. A single interest charge will cost you less than multiple interest charges in the long run.