Bernanke, Fed May Find Inflation Has Unexpected Staying Power July 19 (Bloomberg) -- The Federal Reserve, which for months predicted inflation would ease in the second half of 2006, may have underestimated the staying power of price increases.
Economists -- and anecdotal evidence -- suggest that rising oil costs are forcing companies to lift prices on products from garments to trash bags, several times in some cases. Long-term inflation expectations, by one market measure, are already near an eight-year high, and further signs that prices beside food and energy are picking up may spur the Fed to continue its two-year credit tightening.
``The idea that inflation would be peaking soon and declining by the second half of this year, certainly on a year- over-year basis, I think you have to go back and revise that view,'' said Richard Berner, chief U.S. economist at Morgan Stanley in New York.
Chairman Ben S. Bernanke testifies before Congress today, 90 minutes after the government reports June figures for consumer inflation, which exceeded economists' forecasts in the prior three months. Almost a year after Hurricane Katrina caused energy prices to spike temporarily, tension in the Middle East and demand from China are making higher costs a more permanent part of company life.
Shipping Surcharges
FedEx Corp. and United Parcel Service Inc. reduced fuel surcharges in January after prices retreated following a surge related to Katrina. This month, UPS and FedEx are both adding a 16 percent surcharge on air and international shipping and 4.75 percent for ground shipping. The surcharges, which are adjusted each month, were 13 percent and 3 percent, respectively, last September.
At the five meetings of policy makers from Nov. 1 through May 10, staff economists told Fed officials that inflation, excluding food and energy, would creep up in the first half or through all of 2006, then ease in the second half or in 2007, according to minutes of the sessions. The Fed tomorrow will release minutes of the last meeting, held on June 28-29.
``People had gotten lulled into a sense of complacency,'' said Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut and a former Fed economist. ``I wasn't prepared for how dramatically inflation was going to tick up.''
The Commerce Department's core personal consumption expenditures price index, which excludes food and energy, rose at an annual rate of 2.9 percent from March through May. The increase matched the year-over-year rise in April 2004 as the biggest in a decade. Bernanke is among officials who have said a rate of 1 percent to 2 percent is acceptable.
Consumer Prices
The Labor Department will release the June consumer price index at 8:30 a.m. today in Washington. Excluding food and energy, prices probably rose 2.6 percent from a year earlier, the estimate of 18 economists. So-called core producer prices jumped 1.9 percent from a year ago, up from 1.5 percent, the Commerce Department said yesterday.
Clorox Co., the maker of household bleach and Glad trash bags, raised prices between 5 percent and 15 percent this year on 40 percent of its products because of rising oil and commodity costs. The price increase was ``based on what we perceive to be a long-term shift in our cost structure,'' said Kathryn Caulfield, a spokeswoman for the Oakland, California-based company.
DuPont Co., the third-biggest U.S. chemical maker, said in May it would raise prices on most products for the second time in less than a year. Wellman Inc., which makes polyester fibers for apparel and home furnishings, boosted prices in June for the second time in three months.
New Forecasts
Bernanke appears at 10 a.m. today before the Senate Banking Committee in Washington and testifies to the House Financial Services Committee tomorrow. Also today, the Fed releases its semiannual policy report to Congress, including new forecasts on economic growth, inflation and unemployment from Fed governors and the bank's dozen district presidents.
The Fed's rate-setting Open Market Committee raised the benchmark overnight lending rate on June 29 to 5.25 percent, the 17th-straight increase since June 2004, and said future moves would depend on incoming statistics. The statement that day squeezed three views on inflation into two sentences.
``The high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures,'' the FOMC said. ``Although the moderation in the growth of aggregate demand should help to limit inflation pressures over time, the Committee judges that some inflation risks remain.''
`Less Confidence'
There may be more to rising inflation than energy costs. ``We have less confidence in inflation models,'' said Laurence Meyer, a former Fed governor who is now vice-chairman of Macroeconomic Advisers LLC in Washington. ``It seems like the simple answer is in rising energy prices, but it's not easy to say that.''
A measure of long-term inflation expectations is the margin by which the yield on 10-year U.S. Treasury notes exceeded that on 10-year Treasury Inflation-Protected Securities, or TIPS. The difference was 2.57 percent at 3:46 p.m. in New York yesterday. That's down from this year's high of 2.74 percent in May, though still near the top of a trading range in the past two years.
Fed Vice Chairman Donald Kohn and Governor Randall Kroszner both recently stressed the need for better economic statistics and studies. In a July 6 speech, Kohn cited the ``paucity of empirical research'' on the economic effects of globalization, though he said some numbers suggest it may have held down U.S. inflation. Kroszner said in May that price gauges should account better for technological advancements in areas such as semiconductors and medical diagnostic equipment.
To Utah Senator Robert Bennett, the banking panel's No. 2 Republican, inflation may not be so much of a threat.
``I'd like to get his take on where he thinks the whole inflation issue might be,'' Bennett said of the hearing with Bernanke. ``If you take energy out of it, the inflation indicators are not quite as frightening as they are if we leave it there.''
To contact the reporters on this story: Scott Lanman in Washington at [email protected]; Millie Munshi in Washington at [email protected]
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