Inflation surge puts Fed in a quandary
After the biggest monthly rise in consumer prices since 1991, the central bank can't ignore the risks of inflation.
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Fed officials are walking a fine line – and at the moment they'd rather not be forced to focus on inflation as their top priority. They're also trying to revive a moribund economy and prevent a crisis in the financial industry from growing more severe.
Even as consumer prices surged 1.1 percent in June alone, some other news this week gives the central bank some leeway to balance those competing goals. Oil prices, which have been the big driver of inflation around the world this year, fell dramatically.
After trading at about $147 per barrel, oil dived below $134 Wednesday morning. The change stems partly from higher-than-expected crude-oil inventories, announced by the Energy Department, and partly on other factors such as signs of economic weakness.
Still, after a two-day drop, it's too early to say that oil prices are at a turning point. And inflation indicators remain higher than the Fed would like.
"It's a major concern," says Michael Cosgrove, who publishes the EconoClast, a market newsletter in Dallas. "What they're hoping is that the commodity prices start to drift lower later this year. If that happens, then that will go a long way toward resolving the inflation issue." US workers and consumers have been squeezed this year by a combination of fast-rising prices and an economy that's barely growing – with the number of jobs actually falling each month.
As of June, consumer prices have risen by 4.9 percent in the past year, the highest 12-month inflation rate since 1991.
While the overall rate is what burdens consumers, the bigger worry for Fed policymakers was a sign that higher oil prices are feeding into a more generalized rise in prices.
The so-called core rate of inflation, with food and energy prices stripped out, rose 0.3 percent for the month. Rising oil prices have been a global phenomenon, driven largely by demand in emerging markets, that the Fed has little control over. But if last month's rise in the core rate persists, it would be a sign of a widening inflation problem, Mr. Bryson says.
"You're looking at a 3.5 percent [annual] core inflation rate, which is way too high for the Fed's liking," he says.
So far, prices for one of the key costs businesses face – labor – show little sign of spiraling out of control.
Because wages aren't rising very fast, that also limits the ability of businesses to pass along price hikes.