Bernanke aims for ‘anchored’ inflation

As long as expectations remain steady, the inflation rate should withstand volatile energy and food prices, said the Fed chief.

As long as inflation expectations remain steady, the inflation rate should withstand volatile energy and food prices, said Federal Reserve Chairman Ben Bernanke today.
“With inflation expectations well anchored, a one-time increase in energy prices should not lead to a permanent increase in inflation but only to a change in relative prices,” said Mr. Bernanke in an address to the National Bureau of Economic Research in Cambridge, Mass.
Rising energy prices affect short term inflation.
However, if the public were to set prices and wages in reference to the inflation rate they expect in the long term, and if inflation expectations became less responsive to economic activity changes, inflation itself will become less sensitive to activity, he said.
An example would be the rising cost of energy, which hasn’t led to persistent inflation or a recession, he said.
However, while inflation isn’t as reactive to shocks as it was in the 1970’s, the Federal Reserve will still have to consider price changes when it draws up core inflation forecasts.
“Forecasts of core inflation must take into account the extent to which food and energy costs are passed through other prices,” Mr. Bernanke said.
He also called for a better understanding of how inflation expectations influence actual inflation.