Volcker Says Inflation May Be Rekindled

Federal Reserve Board Chairman Paul A. Volcker cautioned today that inflation may be rekindled with the end of plunging world oil prices, but he denied that he was trying to signal tighter credit policies ahead.

“As a central banker, I always see potential problems down the road,” Volcker told a House banking subcommittee.

Fear of higher interest rates, based on Volcker’s reported comments on inflation to a group in Boston on Wednesday, had sent stock and bond prices down and short-term interest rates up.

However, Volcker told lawmakers too much had been read into his remarks on inflation.

No Signals Given

“I have not given any signals in my mind on that particular question,” Volcker said.

But he reiterated that the current good statistics on inflation--including the largest three-month decline in the government’s consumer price index in 37 years--are due largely to the slide in world oil prices.

“The oil prices are not going to go down forever,” Volcker warned.

He said that while the prices of industrial goods have been showing low rates of inflation, “you’ve had a less good record in the service areas of the economy,” where prices have been rising from 3% to 4% throughout the year.

Major Economic Problems

The head of the nation’s central bank said there are currently many major economic problems facing the United States and other industrialized nations--including the huge and persistent U.S. trade deficit and the problem of Third-World debt.

“Among those problems we have facing us is the continuing problem of dealing with inflationary pressures,” Volcker said.

He said it is unclear whether inflation will remain under control once the oil price decline bottoms out and oil prices begin rising again.

Reports of tighter Fed credit policies circulated on Wednesday after Volcker spoke at a private conference of international bankers in Boston. Although his remarks to them were not disclosed, reports circulated that he expressed opposition to lower interest rates because of fears that they could fuel inflation.

However, Volcker cautioned against such speculation in his remarks today.