World food prices notched a new high in February, adding to concerns that global inflation may be on the rise.
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.
In the US, the Consumer Price Index (CPI) shows signs of accelerating, although economists differ on whether this trend will continue. The CPI rose at a 3.2 percent annual rate in the six months that ended in January, up from a 0.1 percent pace in the prior six months.
Similarly, the CPI category called "food at home" is running at a 3.3 percent annual increase in the same period, up from 1 percent half a year earlier. Education and health care costs don't show signs of acceleration, but are also rising.
Bernanke said that, beyond turmoil in North Africa, "the increases in commodity prices in recent months have largely reflected rising global demand for raw materials ... coupled with constraints on global supply in some cases."
He also noted that commodity prices are up in a range of major currencies, "suggesting that changes in the foreign exchange value of the dollar are unlikely to have been an important driver."
Even if Bernanke is correct that the Fed's easy monetary policy isn't behind the oil and food price trends, the global patterns could have implications for the US economy. A sustained rise in commodity prices, he acknowledged, "would represent a threat both to economic growth and to overall price stability, particularly if [it] were to cause inflation expectations to become less well anchored."
Although Bernanke pledged vigilance on inflation, some economists worry that the Fed and other central banks may not be vigilant enough.
Conditions don't look like an exact replay: In the US, the world's largest economy, wages are no longer commonly indexed to inflation as they were back then. And there's lots of slack in global labor markets.
But the Morgan Stanley report saw reasons for concern about inflation: "Risk-averse global central banks prefer the threat of inflation to the one of deflation," they said, and the Fed may err on the side of stimulus until it sees clear signs of a more normal US job market.
Like in the 1970s, many nations – including China – effectively peg their currencies to the US dollar, and one result is close parallels in monetary policy. An easy policy may make sense for the US, given America's current high unemployment rate. But that doesn't mean Asia benefits from similar policies right now, or that the Fed should make its policies simply by looking at US conditions in isolation from the rest of the world.
One other risk factor: High levels of government debt in many advanced nations may tempt officials to view moderate inflation as a backdoor way of reducing the debt burden.
Of course, if inflation is one risk, the countering threat would be unrest in oil-producing nations acting as a damper on the global economy. A further spike in oil prices could act like tax on consumers and businesses.
The European Central Bank, which has raised its short-term interest rate to 1 percent since the recession ended, held that rate steady in a meeting on Thursday. ECB President Jean-Claude Trichet said the bank is on guard against inflation. But at the same time, he cited commodity prices as a risk to economic growth, "in view of renewed geopolitical tensions."
As of this week, the Morgan Stanley economists argue that oil prices – at levels seen in recent weeks – won't throw the world's economic expansion off track. In part, that's because loose monetary conditions provide some support. They add, however, that those monetary policies make it more likely that oil-price rises would fan wider price inflation.