Strategic Briefing | 4.5.2011 | Inflation

Bernanke Says Fed Must Monitor Inflation ‘Extremely Closely’
Bloomberg | Apr 5
Federal Reserve Chairman Ben S. Bernanke said policy makers must watch inflation “extremely closely” for evidence that rising commodity costs are having more than a temporary impact on consumer prices. “So long as inflation expectations remain stable and well anchored” and the rise in commodity prices slows, as he’s forecasting, then “the increase in inflation will be transitory,” Bernanke said yesterday in response to audience questions after a speech in Stone Mountain, Georgia. “We have to monitor inflation and inflation expectations extremely closely because if my assumptions prove not to be correct, then we would certainly have to respond to that and ensure that we maintain price stability,” he said.

OECD Frets Over Inflation
Wall Street Journal | Apr 5
Economic growth in the world’s richest countries outside disaster-stricken Japan is gaining strength, the Organization for Economic Cooperation and Development said Tuesday in an upbeat interim assessment, but warned that a rise in commodity prices may push up inflation expectations. “We are relatively upbeat; it seems that the recovery is gaining strength,” OECD Chief Economist Pier Carlo Padoan said in an interview, noting that Group of Seven economies could reach annualized growth of about 3% in the first half of the year. Still, he noted that “we may be at the beginning of second-round effects, with commodity prices feeding into inflation expectations.”
Inflation inflicting pain, as wages fail to keep pace with price hikes
Washington Post | Apr 4
It’s not just that prices are rising — it’s that wages aren’t. Previous bouts of inflation have usually meant a wage-price spiral, as pay and prices chase each other ever upward. But now paychecks are falling further and further behind. In the past three months, consumer prices have been rising at a 5.7 percent annual rate while average weekly wages have barely budged, increasing at an annual rate of only 1.3 percent.
Silver Advances to Most Expensive Versus Gold Since 1983 on Inflation Risk
Bloomberg | Apr 5
Silver climbed to its most expensive level versus gold since 1983 as rising inflation spurred by commodity shortages, economic recovery and turmoil in the Middle East bolstered demand. An ounce of gold bought 37.15 ounces of silver at 2:32 p.m. in Singapore, compared with an average of 62 in the past 10 years. Silver for immediate delivery has more than doubled in the past year while gold gained 27 percent, cutting the ratio from a high of 70 in June.
Fed’s own forecasts move to center stage
MarketWatch | Apr 4
When Federal Reserve Chairman Ben Bernanke sits down with reporters at his first press conference in late April, he will not come alone. He will bring with him the consensus economic forecast of Fed officials. These projections have been largely ignored, even by the Fed itself, especially during the Volcker and Greenspan eras. But Bernanke is dragging them into the limelight. “This is an effort to move the forecasts front and center,” said Lou Crandall, chief economist at Wrightson ICAP. The Fed will release the projections on the same day that Bernanke talks to the press. The past practice had been to delay release of the forecasts until three weeks following the meetings.
The Taylor Rule Is Wrong
Brian Wesbury (First Trust) | Apr 4
The working hypothesis of just about every forecaster or Fed-watcher in the world has been that the Fed would not tighten at all until 2012. That meant no interest rate hikes this year. And to avoid putting on any brakes at all, the Fed would even think about QE-III. But this view is now coming under fire, not just from the private sector, but from inside the Fed
Stronger gains in employment, along with some relatively hot inflation reports have pushed many regional Fed presidents to make hawkish statements. Charles Plosser, Philadelphia Fed President, said recently that the Fed might need to head for the “exit ramp.” Jeffrey Lacker, Richmond Fed President, said he would “not be surprised” if action were taken to fight inflation
before the end of the year. James Bullard, St. Louis Fed President, said “U.S. monetary policy cannot remain ultraaccommodative” and hinted about tightening this year.
Narayana Kocherlakota, Minneapolis Fed President, said it was “certainly possible” that interest rates could be lifted in late 2011.
For the record, we think the Fed is way behind the curve and that accelerating inflation over the next few years is already baked in the cake. However, the Washington-based board of the Federal Reserve holds the opposite view. They believe inflation is not a problem at all and it has
The Fed and Inflation
CNBC | Apr 1
Pimco market strategist and portfolio manager Tony Crescenzi said Fed officials have changed their tone slightly to express a change in inflation expectations. He said Fed Chairman Ben Bernanke, in his semiannual testimony to Congress last month, used the word inflation 22 times, compared to nine times in his prepared remarks six months earlier. “It seems that the Fed is trying to say, while the Fed itself is not concerned about headline inflation, it is concerned that the public is because it can affect inflation expectations, and inflation expectations can feed the enemy, inflation,” Crescenzi said in an interview this week. Crescenzi said he expects the Fed to complete its quantitative easing (QE2) program, but notes in its last statement it acknowledged the possibility of inflation while removing concerns about deflation.