How Long Can the Fed Continue to Downplay Inflation?


When a Federal Reserve committee meets Tuesday to consider the federal interest rate, it will likely revise its glum outlook into something brighter. But will it also acknowledge inflation?

When the Federal Reserve’s interest-rate-setting committee meets on Tuesday to consider whether to change its monetary policy, it will likely be forced to alter the way it views the economy. It will probably rewrite its dismal assessment of unemployment, which has fallen, and acknowledge that the economy seems to be picking up. But will it also admit that the whiff of inflation is much stronger?

Prices for food and gasoline have lept in recent months, but they are not part of the key measure known as “core inflation,” so the Fed tends to play down their impact. In his recent Congressional testimony, Fed Chairman Ben Bernanke said “the recent rise in commodity prices will lead to, at most, a temporary and relatively modest increase in U.S. consumer price inflation.”

Tell that to Bill Dudley, president of the New York Federal Reserve Bank, who was lambasted by a crowd in New York last week and angrily asked when he’s last gone shopping.

Inflation Expectations Surge

There’s no doubt that the economy is growing stronger, as reflected by the latest retails-sales report on Friday. Retail spending grew 1% in February, with auto sales — which increased 2.3% — providing the biggest boost, increasing 2.3% in the month.

Unemployment has declined to 8.9%, representing a drop of a full percent in only three months. The employment component of the ISM manufacturing index in February reached its highest level since 1973.

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