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Bernanke downplays inflation concerns tied to Middle East turmoil and Federal Reserve actions

March 1, 2011 |  7:55 am

Federal Reserve Chairman Ben S. Bernanke said Tuesday that a sustained rise in prices for oil and other commodities would threaten the economic recovery, but that even with the turmoil in the Middle East he did not expect inflation problems in the United States.

In testimony to the Senate Banking Committee, Bernanke said, "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." That projection is consistent with the views of other members of the Federal Reserve Open Market Committee, which sets monetary policy, and most private forecasters, he said.

While the recent sharp rise in gas prices is clearly a problem for many people, they "do not yet pose a significant risk" to the recovery or inflation, Bernanke said.

Bernanke's semiannual report to Congress this week -- he will appear before a House committee Wednesday -- comes as some lawmakers, particularly Republicans, have raised strong concerns about inflation. Critics of the Fed have said its ongoing plan to further stimulate the economy by purchasing up to $600 billion in Treasury bonds, a strategy known as quantitative easing, is fueling inflation by flooding the market with cheap money.

Sen. Richard C. Shelby (R-Ala.) warned of the implications if inflation gained too much momentum.

"Once price stability has been lost, as you well know, it is difficult and very costly to regain," Shelby said. He recalled the battle led by former Fed Chairman Paul Volcker in the early 1980s to deal with runaway inflation, which led to mortgage rates around 18% and helped spark a deep recession.

Bernanke acknowledged the concerns about inflation, fueled recently by rising oil prices because of unrest in the Middle East.

"Although overall inflation is low, since summer we have seen significant increases in some highly visible prices, including those of gasoline and other commodities," he said. "Notably, in the past few weeks, concerns about unrest in the Middle East and North Africa and the possible effects on global oil supplies have led oil and gasoline prices to rise further."

But he said the effect on U.S. consumer prices of such rises in commodities "has been quite low in recent decades."

Bernanke said evidence so far was that the Fed's bond-buying program was having "a beneficial effect" on the economy, but he and his colleagues would continue to review the program and make changes as necessary.

 -- Jim Puzzanghera

Photo: Federal Reserve Chairman Ben S. Bernanke prepares to testify to the Senate Banking Committee Tuesday. Credit: Associated Press