NEW YORK – Since sustained hikes in oil prices could “cause inflation expectations to become less well anchored,” the Fed will monitor developments and “respond as necessary,” Federal Reserve Board Chairman Ben S. Bernanke told the Senate Banking, Housing, and Urban Affairs Committee Tuesday.
While companies have been slow to pass-through price increases, “Currently, the cost pressures from higher commodity prices are also being offset by the stability in unit labor costs,” Bernanke said according to prepared text of the testimony, which was released by the Fed. “Thus, the most likely outcome is that the recent rise in commodity prices will lead to, at most, a temporary and relatively modest increase in U.S. consumer price inflation--an outlook consistent with the projections of both FOMC participants and most private forecasters. That said, sustained rises in the prices of oil or other commodities would represent a threat both to economic growth and to overall price stability, particularly if they were to cause inflation expectations to become less well anchored. We will continue to monitor these developments closely and are prepared to respond as necessary to best support the ongoing recovery in a context of price stability.”
While policymakers still view inflation as remaining below desired this year and near the Fed’s desired 2% level next year and in 2013, private forecasts are also calling for “subdued inflation over the next few years.”
Despite the projections, “significant increases” in “highly visible prices,” such as gasoline, have plagued the economy since summer. Unrest in the Middle East and North Africa and their “possible effects on global oil supplies have led oil and gasoline prices to rise further.”
The recovery slowed in the spring and as a result the economy is not strong enough to meaningfully prop up the labor market, he repeated. “Under such conditions, the Federal Reserve would normally ease monetary policy by reducing the target for its short-term policy interest rate, the federal funds rate,” Bernanke said, but those rates have been near zero since December 2008.
