April 4, 2010

TRY DEMANDING A RAISE:

Inflation Fears Cut Two Ways At the Fed (JON HILSENRATH, 4/04/10, WSJ)

In 2008, overall consumer prices actually fell for the first time in half a century, but then rebounded as energy prices stabilized. Over the past 12 months, the consumer-price index has risen 2.1%. But measures of inflation that strip out volatile energy and food prices are decelerating. Excluding food and energy, consumer prices in February were 1.3% higher than a year earlier. That was the smallest 12-month increase in six years, and well below year-over-year increases of above 2% before the recession.

"When unemployment is so high, wages and incomes tend to rise slowly, and producers and retailers have a hard time raising prices," Ms. Yellen, who is expected to be President Barack Obama's nominee to become the Fed's vice chairman, said in a speech last week. "That's the situation we're in today, and, as a result, underlying inflation pressures are already very low and trending downward."

Mr. Dudley made similar comments in comments in Lexington, Va., last week. "The substantial amount of slack in productive capacity that exists today will likely only be absorbed gradually. Consequently, trend inflation, at least over the near term, should remain very low."

In this camp, one worry is that inflation-adjusted interest rates—also known as real interest rates—could rise even if the Fed sits on its hands. Such a rise would be a disincentive for businesses to invest in new projects and for consumers to spend.

This unintended increase in rates could put a brake on the economic recovery.

Posted by Orrin Judd at April 4, 2010 7:09 PM
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