Sunday, February 13, 2011

Inflation Seems To Be Beating Deflation

America's inflation alarm is growing ever louder
The world's most powerful banker gave his first press conference this month. Well, sort of.

Ben Bernanke insists that more expensive food and petrol won't morph into broader price rises across the economy, particularly in wages
The questions were put to Ben Bernanke by a polite chap from the National Press Club in Washington, but it was the closest the Federal Reserve chairman had ever come to one. And Bernanke revealed that the central bank is seriously examining whether to follow the Bank of England and the European Central Bank and make a habit of them.
In true central banker fashion, the former Princeton University professor didn't let on whether the prospect filled him with joy or horror. At the very least it will give him and Mervyn King something to exchange notes on in any awkward silences at G20 meetings. But Bernanke's first outing also showed that, unlike at King's quarterly gatherings on Threadneedle Street, domestic journalists may be in a minority of those asking the questions.
The political pitfalls of this were evident as he spent time arguing that the Fed's policies are not to blame for Egypt's rising food prices. Yes, a perfectly legitimate question. But the US audience may have wondered whether it was the most pressing one when it's also getting more expensive for Americans to put a meal on the table.
Bernanke's first conference came at a time when the inflation alarm is starting to sound more loudly here. It is, of course, already blaring elsewhere. Inflation is the worry for many large, rapidly growing economies, especially given the lower incomes most of their populations have. It's the bugbear of home-grown critics of the Fed's second round of quantitative easing. And, as Mervyn King knows only too well, it's an excruciating headache for the Bank of England.
A quick glance at the latest inflation data from December shows the pain they're causing many Americans. Meat prices rose 5.5pc last year, while dairy products were 3.7pc higher. If a car was used to get the food, the driver would have found that gasoline was almost 14pc costlier. It's little wonder, then, that a growing number of people are relying on government-funded food stamps to pay for the basics. According to the Department of Agriculture, the number using food stamps rose 14pc to 43m in November, the latest month for which figures are available.

It's something those who sit at the Fed's top table acknowledged this week. Dennis Lockhart, the man who runs the Fed's branch in Atlanta, admitted that "inflation anxiety" is rising among the public. It was almost the only subject Congressmen wanted to quiz the Fed chairman on when he testified before them on Wednesday. While Bernanke may end up handling possible press conferences differently to King, the two follow the same script on inflation.
Both insist that more expensive food and petrol won't morph into broader price rises across the economy, particularly in wages. The basic calculation in the US is that with 9pc unemployment, very few people are going to wrestle a decent pay rise from their boss this year. So far, at least, the figures support that view. The rise in average hourly earnings slowed to 1.7pc last year compared with 1.8pc in 2009 and 3.4pc a year before that. And the measure of inflation the Fed really watches, known as the personal consumption expenditure index, was just 0.7pc higher in December than a year earlier.
So more pain for consumers' wallets, but equally no need to pull back on QE or raise interest rates. It's also worth remembering that, unlike the Bank of England, the Fed is officially tasked with promoting maximum employment. To paraphrase Sir Alex Ferguson, the Manchester United football manager, King is much closer to the "squeaky bum time" of the monetary cycle than Bernanke.
But there's little reason for those at the Fed to relax. Economists on Wall Street have pencilled in growth of 3.2pc this year for the US. The strongest expected showing of any major Western economy is likely to bring inflation pressures with it. What's more, there's a debate raging over whether the financial crisis has fundamentally changed the inflation dynamics in America. Those at Barclays Capital, for example, reckon that the economy will start generating significant inflation with unemployment as high as 7pc, rather than the 5pc traditionally estimated, because a chunk of the country's unemployment is now structural.
Hot seats are an occupational hazard for central bankers. But the need, at some point, to dismantle the vast life-support clamped to the throat of economies during the stomach-churning depths of the crisis was always going to make those seats uncomfortably hot.
Right now, King's must look particularly warm even to Bernanke. But whether it's through a happier combination of stronger growth and higher inflation, or something much more troublesome, Bernanke's seat will surely get hotter later this year.
And if the Fed does decide to introduce press conferences, the first one should be unmissable.

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