Expectations Of Inflation Rising
High commodity prices, a weak dollar and low interest rates have raised expectations of long term inflation according to Fed Chairman Ben Bernanke in a speech given at Harvard University earlier today. He discussed key differences in the oil price shocks of the 1970’s and today.
For a central banker, a particularly critical difference between then and now is what has happened to inflation and inflation expectations. The overall inflation rate has averaged about 3-1/2 percent over the past four quarters, significantly higher than we would like but much less than the double-digit rates that inflation reached in the mid-1970s and then again in 1980. Moreover, the increase in inflation has been milder this time–on the order of 1 percentage point over the past year as compared with the 6 percentage point jump that followed the 1973 oil price shock.
Another key difference is that while the price shocks of the 1970’s were supply driven, the debate rages whether current oil prices can be attributed to increased demand or speculation. That being said, the Fed is still in a precarious position with many critics feeling that it is beginning to lose it’s credibility as an inflation fighter.
To this point unlike the Fed, the other central banks of the world have resisted lowering interest rates as their economies have showed signs of slowing. Granted much of the world’s current economic woes started in this country when the housing bubble burst and the subsequent subprime collapse that followed.
Still the destabilization effects that inflation can have on an economy are frightful and can take years to overcome. One need only look at certain nations in South America to see that point clearly.
That’s why the Fed’s priority on maintaining economic growth in the face of rising commodity prices has some economists puzzled. Recessions are a normal part of the business cycle and in trying to avoid one I’ve started wondering whether the Fed’s actions has only served to mire our economy in a longer period of stagnant growth.
