Federal Reserve Chairman Ben Bernanke boldly predicted to Congress on Tuesday (March 1) that rising oil prices will cause only a brief and modest rise in consumer inflation, the Associated Press reported.
If he’s wrong, as some lawmakers suggested to him, the risks are high: a weaker economy and elevated consumer inflation.
Bernanke’s credibility is at stake, too. His duties as Fed chief require a balancing act: Leading the economy to stronger growth while making sure inflation doesn’t rise too high.
Appearing before the Senate Banking Committee, Bernanke faced sharp questions about whether rising gasoline prices could spread dangerous inflation through the economy. He said he did not think so.
“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,” Bernanke said.
Still, persistently higher prices could shake consumer confidence, prompting consumers to reduce spending. And that would weaken the economy, he acknowledged.
Gas prices jumped over the weekend to a new nationwide average of $3.37 a gallon. That’s 26.7 cents a gallon more than a month ago. Food prices in January rose at the fastest pace since the fall of 2008.
Sen. Patrick Toomey, R-Pa., called the rise in commodity prices “stunning.” Toomey said he worries about the effects of those higher prices, combined with the Fed’s efforts to boost the economy through a Treasury bond-purchase program. Toomey said they might be “planting the seeds of serious inflation down the road.”
Bernanke defended the Fed’s $600 billion Treasury bond-buying program. He said it is still needed to energize the economy and reduce unemployment, now at 9%. The bond-buying program is intended to lower rates on loans and lift stock prices, spurring more spending.
Republicans in Congress and some Fed officials say they fear the bond purchases could trigger high inflation and a wave of speculative buying on Wall Street that could lead to new bubbles in the prices of assets like stocks and bonds.
“Once price stability has been lost, it is difficult and very costly to regain,” warned Sen. Richard Shelby of Alabama, the panel’s top-ranking Republican.
Shelby pointed to the toxic situation in the late 1970s and 1980s when inflation hit double digits. To combat out-of-control prices, Fed Chairman Paul Volcker ratcheted up interest rates. Unemployment soared. And the economy fell into a deep recession.
Bernanke said the rise in oil and global commodities prices was due to stronger demand from fast-growing countries like China, not to the Fed’s stimulative policies. But he ran into concerns from Democrats as well as Republicans on the committee.
“I see food prices rising,” said Sen. Robert Menendez, D-N.J. “I see gas prices rising even before what was happening in North Africa, although that certainly is an exacerbating reality. Tuition rates rising … I just see a combination of rising prices for the average family.”
One reason the Fed launched the bond-buying program in November was to prevent deflation — a prolonged drop in prices of goods, wages and values of homes and stocks. But Bernanke told lawmakers that the risk of deflation has become “negligible.”