Reining in inflation fears is key

Federal Reserve Board Chairman Ben Bernanke, in a speech in Cambridge, Mass., last week, said that as long as inflation expectations remain steady, the inflation rate itself should also hold steady in the face of volatile energy and food prices. He could have made the point more concisely by borrowing an example from President Franklin Delano Roosevelt, who said: “The only thing we have to fear is fear itself.” Mr. Bernanke could have summarized his thoughts this way: “The only thing we have to fear about inflation is fear of inflation.” That isn’t quite as succinct or as poetic as FDR’s comment, but it makes the point Mr. Bernanke was trying to make. That is: Inflationary expectations can be self-fulfilling. If workers expect higher prices to affect more than food and gasoline, they will demand higher wages. If employers expect higher wage and supply costs, they will raise the prices of their products. Inflation will work its way through the economy, getting ever higher until the Fed or some external force breaks the inflationary expectations. Mr. Bernanke’s task is to keep the fear of inflation from getting out of control. So far, he has managed to do so. Let’s hope he keeps it up.