The rising price of oil may be putting some inflation scares in the market, but it's not likely to change the views of Ben S. Bernanke and the
Federal Reserve Board on where the economy is headed.
If anything, the Fed will be more concerned about the psychological effect that $4-plus prices for a gallon of gas may have on consumer confidence rather than whether it triggers a round of inflation. For the time being, the 8.3% unemployment rate is — and should be — the central bank's greater concern, said Lawrence Weinman, a Los Angeles-based financial adviser managing $120 million in assets.
“If the economy gets going, inflation will rise a little, but there's a long way to go before the labor market and the housing market get back into shape,” Mr. Weinman said. “It could be a disaster to cut fiscal spending and tighten monetary policy now. It would hurt the still-weak economy.”
Beth Ann Bovino, deputy chief economist for Standard & Poor's, also thinks that oil prices, which have risen 39% from a low of $76 in early October, will have little effect on Fed policies. “Headline inflation shot up last year, too, and it came back down. If monetary policy moved on oil prices, we'd be all over the place,” Ms. Bovino said.
She expects the Fed to continue to look at labor inflation and rents for signals that it is time to alter the strategy of keeping short-term interest rates near zero. And on those fronts, there is little to suggest that broader inflation is becoming a problem.
Ms. Bovino doubts that a recent revision of Labor Department statistics that showed labor expenses rising 2% last year (an earlier estimate put the figure at 1.2%) indicates significant wage pressure. The number is backed out from the GDP report, and includes benefit expenses, estimated hours worked — including by self-employed individuals — and could also reflect a reduction in business spending on plant and equipment that would have otherwise boosted productivity.
The more important measure for the labor market is real average hourly earnings, which fell by 1% in January, compared with the same month in 2011, and have been flat to negative for most of the last year. “We're still above 8% unemployment, which means workers have very little bargaining power,” said Thomas Holzheu, head of economic research and consulting for North America at the Swiss Re Group.
While housing markets are stabilizing in some parts of the country, the latest Fiserv Case-Shiller Home Prices indices data for January showed that prices were still falling in a majority of the U.S.
“Between the housing crisis, the Europe crisis and the fiscal drag, I think [Mr. Bernanke] is less worried about the risk of inflation than he is about the economy's stalling,” Mr. Holzheu said.
Consumers aren't anticipating any major move in prices either, at least based on the latest results of the University of Michigan Consumer Sentiment Survey of 500 households. The mid-February survey showed consumers' expecting inflation of 3.3% over the next 12 months (In the February 2011 survey, the inflation prediction was 4.6%). The five-year inflation expectation was just 2.9% — just about the same as Mr. Bernanke's target for long-term inflation.
