Inflation pressure from higher commodity prices won’t last, Fed’s Yellen says


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The jump in oil and other commodity prices so far isn’t enough to make the Federal Reserve want to tighten credit, the central bank’s vice chairwoman said Monday.

In a speech in New York, Janet Yellen hewed to Chairman Ben S. Bernanke’s line that inflation pressures from higher commodity prices will be “transitory.”


“These developments seem unlikely to have persistent effects on consumer inflation or to derail the economic recovery and hence do not, in my view, warrant any substantial shift in the stance of monetary policy,” Yellen said.

Inflation concerns have mounted as crude oil has surged 20% year to date and other raw materials costs also have risen sharply. Last week the European Central Bank raised its key short-term interest rate from 1% to 1.25% -- the first increase since mid-2008 -- citing inflation worries.

The U.S. government’s report on the consumer price index for March, due Friday, is expected to show the index up 2.6% from a year earlier, according to economists surveyed by Bloomberg News. That would be the biggest increase since January 2010 and an acceleration from 2.1% in February.

But Bernanke and Yellen insist there’s no good reason for the Fed to consider raising short-term interest rates from the current near-zero level.

For one, Yellen said, futures contracts for key commodities are signaling that “prices will roughly stabilize near current levels or even decline in some cases.” Oil futures for May delivery closed at $109.92 a barrel Monday, while the price for December delivery was $111.83, or less than 2% higher.

Yellen also stressed another of Bernanke’s favorite themes, which is that there’s low risk of commodity prices fueling an inflation spiral because wage growth has been lousy, a consequence of the labor glut.

In other words, consumers don’t have the financial wherewithal to handle rising prices, so businesses are unlikely to succeed in passing through much of their commodity-cost increases. “Indeed, it would be difficult to get a sustained increase in inflation as long as growth in nominal wages remains as low as we have seen recently,” Yellen said. . . .

The Fed can justify keeping monetary policy loose, Yellen said, because “unemployment remains elevated, longer-run inflation expectations remain well-anchored, and measures of underlying inflation are somewhat low relative to the rate of 2% or a bit less” that the Fed wants to see. The reference to “underlying inflation” is to the so-called core rate, which excludes food and energy costs. The core CPI rate is expected to be up 1.2% year-over-year in March.

Clearly aware that many Americans bristle at the idea of focusing on the core inflation rate, Yellen said the Fed’s emphasis on that measure “is not intended to downplay the importance of [food and energy] in the cost of living.”

Rather, she said, “We pay attention to core inflation and similar measures because, in light of the volatility of food and energy prices, core inflation has been a better forecaster of overall inflation in the medium term than overall inflation itself has been over the past 25 years.”

To paraphrase the Fed in language it would never use, “The core rate is our inflation story, and we’re sticking with it.”

-- Tom Petruno


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