Maybe, just maybe, Fed Chairman Bernanke has no better handle on inflation’s future than the rest of us.
Yes, Ben’s a smart guy. To be precise, he’s one of the most respected monetary economists in the country, if not the world. That’s a big part of why he sits atop the world’s most important central bank. But as his testimony yesterday to Congress suggested, even the mighty feel inclined to bow to the vagaries of the future when it comes to setting monetary policy for the morrow by making decisions today.
We refer readers to yesterday’s news that core inflation continued to fall in June. By any reasonable standard, the trend should encourage the Fed, having professed for some time now that core measures of inflation are superior to headline measures for influencing monetary policy. But listening to Bernanke’s testimony, we were struck by his tendency for hedging his comments about the prospects for keeping inflation contained.
At the heart of this hedging was the Fed chief’s reference to rising headline inflation (which includes food and energy) at a time when core (which excludes those two items) is slipping. “Sizable increases in food and energy prices have boosted overall inflation and eroded real incomes in recent months–both unwelcome developments,” he admitted in his prepared remarks. “As measured by changes in the price index for personal consumption expenditures (PCE inflation), inflation ran at an annual rate of 4.4 percent over the first five months of this year, a rate that, if maintained, would clearly be inconsistent with the objective of price stability.”