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Crowd turns ornery as Fed official preaches 'low inflation' message

March 11, 2011 |  8:17 pm

New York Federal Reserve Bank President Bill Dudley went amongst the common people on Friday.

It didn’t go so well, once Dudley tried to defend the Fed’s official view that inflation remains low.

From Reuters:

In Queens, New York, on Friday, William Dudley was bombarded with questions about food inflation, and his attempt to put rising commodity prices into a broader economic context only made things worse.

Dudley "When was the last time, sir, that you went grocery shopping?" one audience member asked.

Dudley tried to explain how the Fed sees things: Yes, food prices may be rising, but at the same time, other prices are declining.  . . . "Today you can buy an iPad 2 that costs the same as an iPad 1 that is twice as powerful," he said referring to Apple Inc.'s latest handheld tablet computer hitting stores on Friday. "You have to look at the prices of all things," he said.

This prompted guffaws and widespread murmuring from the audience, with one audience member calling the comment "tone deaf."

"I can't eat an iPad," another quipped.

Dudley should have known better than to try to make the Fed’s case for “core” inflation before an audience of real people. The core, the central bank’s preferred investment gauge, strips out food and energy costs on the premise that they’re volatile and don’t show the underlying price trend of most goods and services.

By the Fed’s reckoning, then, inflation in January was up just 0.8% from a year earlier.

But as every financial writer knows, the public’s reaction to the core-inflation idea is visceral, and always has been -- i.e., “Yeah, as long as you don’t eat, drink, drive or heat your house, inflation is low.”

As I wrote last weekend, the Fed knows all too well that it has to manage the public’s expectations about inflation. If people begin to believe that inflation is rising sharply it can become self-fulfilling -- by encouraging hoarding, for example. (Think: toilet paper in the early 1970s.)

By one measure, the Fed is losing the battle: The latest University of Michigan national consumer-confidence survey, reported Friday, found that inflation expectations have jumped with oil’s surge in recent weeks.

The average inflation rate expected by consumers over the next 12 months is 4.6%, the highest since 2008 and up sharply from 3.4% in the February survey.

-- Tom Petruno


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Photo: New York Fed President William Dudley. Credit: Federal Reserve