Federal Reserve Chairman Ben S. Bernanke said the surge in oil and other commodity prices probably won't cause a permanent increase in broader inflation and repeated that borrowing costs are likely to stay low.

Experience with such price gains in recent decades, along with currently stable labor costs, suggests a "temporary and relatively modest increase in U.S. consumer price inflation," Bernanke said today in his semi-annual monetary policy testimony before the Senate Banking Committee in Washington. He reiterated the Fed's outlook that while growth will accelerate this year, he still wants to see a "sustained period of stronger job creation."

The comments suggest the Fed will stay on course to complete $600 billion of Treasury purchases through June in a bid to reduce an unemployment rate persisting at 9 percent or higher for almost two years. Bernanke didn't say what the Fed's next step will be after finishing the bond buying under record monetary stimulus that has been criticized by Republicans he's facing today and tomorrow.

Even with his inflation outlook, "sustained rises in the prices of oil or other commodities would represent a threat both to economic growth and to overall price stability, particularly if they were to cause inflation expectations to become less well anchored," said Bernanke, 57, a former Princeton University economist. "We will continue to monitor these developments closely and are prepared to respond as necessary to best support the ongoing recovery in a context of price stability."

David Fuller's view Might the Fed Chairman be 'whistling in the dark' on inflation? After all, with US unemployment stubbornly high the last thing he will want to see is inflation. He will not see it in US wages, house prices or perhaps even rentals, unlike the 1970s. Those inflationary pressures are occurring in stronger economies.

However as Irwin Stelzer said in his Sunday Times column this week: "American Account: Can America's recovery survive sky-high oil?" (may require subscription registration,PDF also provided):

Even the cut-price retailer Wal-Mart is estimating that the price of its mix of goods will increase by 4% this year. If you don't eat, drive, wear clothes, or take any medication, you will believe the Fed's assertion that inflation is tame. Otherwise, you probably won't.

I agree. In the West, inflation is mainly about commodity prices, especially for crude oil (Brent & NYME), which rallied sharply today on additional Mideast unrest.


Until we see technical evidence to the contrary, we should assume that this concern over a spike in oil prices is going to remain with us for a while longer.