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Bernanke: Don't blame Federal Reserve for record-high food prices

Ben Bernanke says Federal Reserve policy is not responsible for the UN's Food Price Index now standing at its highest level in 21 years or gasoline costs rising 49% in six months.

By Staff writer / March 3, 2011

Chairman of the Federal Reserve Ben Bernanke testifies before the House Committee on Financial Services on Capitol Hill in Washington on March 2. The Fed hopes to hold inflation at about 2%, said Dr. Bernanke.

Kevin Lamarque / Reuters

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World food prices notched a new high in February, adding to concerns that global inflation may be on the rise.

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The news raises – again – a question that Federal Reserve Chairman Ben Bernanke faced during testimony to Congress this week: Is the Fed to blame for price pressures?

Some of the most visible prices consumers face are on the rise, and the Fed has been pursuing a controversial economic stimulus policy of near-zero interest plus an unusual bond-purchase program known as "quantitative easing."

Fed officials "have learned the lessons of the 1970s," said Dr. Bernanke. He offered a spirited defense of Fed policies to House and Senate lawmakers, emphasizing the growing demand for food and other commodities in emerging-market nations.

Economists widely agree that Fed policy isn't the only factor at play in prices for food, oil, and other goods.

But some do worry about a version of 1970s-style "stagflation" – where sub-par economic performance couples with rising prices – and say the Fed and other central banks are playing a role.

So this debate is far from settled.

"I see food prices rising. I see gas prices rising, even before what was happening in North Africa, ...[and] tuition rates rising," said Sen. Robert Menendez (D) of New Jersey on Tuesday, asking Bernanke whether Fed policies are working.

The next day, Rep. Ron Paul (R) of Texas, a perennial Fed critic, had sharp words for the Fed Chairman, ending a monologue about the eroding value of US currency with a simple question: "What is your definition of the dollar?"

For the record, although Bernanke differed with Mr. Paul about Fed actions, he delivered an inflation-aware reply: "My definition of the dollar is what it can buy. Consumers ... want to buy food, and gasoline, and clothes and all the other things that are in the consumer basket."

He said the Fed aims to hold inflation – the annual rise in prices in that consumer basket – at about 2 percent. Why not a target of zero inflation? Bernanke described 2 percent as "consistent with international standards of where inflation should be to appropriately trade off the benefits of low inflation against the risks of being too close to a deflationary zone."

So how is inflation doing now?

The starkest evidence is global rather than US-centered. Oil prices are up about 25 percent in recent months, with political unrest in the Middle East and North Africa a key factor behind a recent surge above $100 per barrel. Americans have seen gas-pump costs soar at an annual rate of 49 percent in the past six months.

Export prices of major grains are up 70 percent in the past year, the UN Food and Agriculture Organization said Thursday. The overall FAO Food Price Index has risen for eight months in a row, now standing at its highest level in the index's 21-year history.

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