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Analysis
Different planet?

Different planet?

Fed: Made in USA inflation remains low

by Darrell Delamaide

Thu 10 Feb 2011

As oil and food prices shoot upwards around the world, markets have grown nervous about inflation. Federal Reserve officials, however, serenely assure the US public that it’s not a problem.

“Are the Fed and the public on different planets?” Atlanta Fed president Dennis Lockhart asked not so rhetorically in a speech this week in Alabama, noting a number of headlines worrying about inflation.

In Congress, as Fed chairman Ben Bernanke made his first appearance in the House of Representatives since it came under Republican control, one lawmaker anxiously waved a Wall Street Journal with the headline “Inflation worries spread.”

Bernanke easily parried the implications for Fed policy by noting that the story was mostly concerned with emerging markets like China and Brazil, where central banks have raised their rates to dampen inflation.

“In the United States, inflation made here in the US is very, very low,” Bernanke said.

The confusion lies, Lockhart told his Alabama audience, in equating inflation with increases in certain costs of living. Yes, food and gasoline prices have risen, but that doesn’t mean there has been an overall loss in the purchasing power of the dollar, he explained.

The Fed can deal with generalised inflation, but is powerless to influence the cost of living. “We do not produce oil,” Lockhart said. “Nor do we grow food or provide health care. We cannot prevent the next oil shock, or drought, or a strike somewhere – events that cause prices of certain goods to rise and change your cost of living.”

Monetary policy is too blunt an instrument to target specific markets, Lockhart argued. It affects the value of the dollar across the board, so that any targeted item would still be expensive relative to income and to everything else.

Despite these comments, market analysts now see it as much likelier that the Fed will start raising rates before the year is out. Improved economic data suggest the Fed will not extend its asset purchases beyond their planned end in June and may raise the federal funds rate target, frozen near zero since December 2008, in December of this year.

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