Bernanke jawboning on inflation ... again
"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. From the perspective of monetary policy, just as important as the behavior of actual inflation is what households and businesses expect to happen to inflation in the future, particularly over the longer term. If people expect an increase in inflation to be temporary and do not build it into their longer-term plans for setting wages and prices, then the inflation created by a shock to oil prices will tend to fade relatively quickly. Some indicators of longer-term inflation expectations have risen in recent months, which is a significant concern for the Federal Reserve. We will need to monitor that situation closely."
Bernanke notes that we don't have evidence of a wage-price spiral like we did in the 1970s. But clearly, he is expressing more concern about inflation now than we were hearing several weeks ago.
I've been saying for a while that if Fed policymakers really want to do something about rising commodity prices, they should start by looking in the mirror and recognizing that they are part of the problem. Their negative real interest policy has been a key contributor to the recent run up in prices. Note my chart above, which graphs the nominal funds rate against crude oil futures prices. Maybe Bernanke's recent comments signal that they are starting to "get it." One can only hope.