Federal Reserve Chairman Ben Bernanke said Wednesday that long term inflationary expectations are concerning but he does not believe the United States will experience the out-of-control prices seen with 1970s oil shocks.
"Some indicators of longer-term inflation expectations have risen in recent months, which is a significant concern for the Federal Reserve" Bernanke told graduating students at Harvard University. "We will need to monitor that situation closely" he added but underlined that "we see little indication today of the beginnings of a 1970s-style wage-price spiral, in which wages and prices chased each other ever upward". Back then the US economy suffered from a dangerous combination of inflation and stagnant growth and there are fears among analysts and economists that the US may be heading in that direction again. Then as now, the world suffered a serious oil price shock, sharply rising prices for food and other commodities and low economic growth indicated Bernanke who nevertheless said that the US economy today is more flexible in responding to difficulties and more energy efficient than a generation ago. "Since 1975, the energy required to produce a given amount of output in the United States has fallen by half" he said. Bernanke's remarks come just one day after he said that the Fed's rate-cutting campaign could be coming to an end because of increasing concerns about inflation and the weakened dollar role in pushing prices higher. The Fed is paying attention to the extent to which consumers, investors and businesses believe prices will rise in the future. Monitoring those "inflation expectations" are important. If people believe inflation will keep going up, they will change their behavior in ways that aggravate inflation, he argued. Bernanke recalled that paychecks today are shrinking as rising prices bite into them. In the 1970s, people were demanding, and getting, higher wages in anticipation of rapidly rising prices; hence, the "wage-price" spiral. US inflation rate has averaged about 3.5% percent over the past four quarters. That is "significantly higher" than the Fed would like but much less than the double-digit inflation rates of the mid-1970s and 1980. Bernanke also pointed out that despite the pain in people's purses, the US economy as a whole has "thus far dealt with the current oil price shock comparatively well". However, challenges remain with rising global demand for energy, especially "if continued demand growth and constrained supplies maintain intense pressure on prices". The Federal Reserve monetary committee is scheduled to meet next June 24th.