CHATHAM, Mass. — Persistent oil price shocks can shake inflation expectations and have already pressured the unemployment and inflation rates, and there is no automatic interest rate formula the Federal Reserve can use to replace continuous Federal Open Market Committee vigilance, Fed vice chairman Donald Kohn said yesterday.
Using the Fed’s preferred inflation measure, that of personal consumption expenditures, Kohn said that measured inflation “should be gauged by the rate of change in a broad set of prices.”
Nevertheless, he said, despite the fact that historically, “a sharp jump in oil prices appears to have had only modest effects on the future rate of inflation,” the recent persistence of oil price acceleration has “contributed to a rise in the year-ahead inflation expectations of households, especially this year.”
Kohn warned: “Any tendency for these longer-term inflation expectations to drift higher or even to fail to reserve over time would have troublesome implications for the outlook for inflation.”
— Market News International