Bernanke Says Rise in Price Expectations a `Concern'

Federal Reserve Chairman Ben S. Bernanke said while rising public expectations for inflation are a ``significant concern,'' there's little sign of the pressures that drove price increases above 10 percent in the 1970s.

``Some indicators of longer-term inflation expectations have risen in recent months, which is a significant concern'' for the Fed, Bernanke said today in a speech during a Class Day ceremony at Harvard University in Cambridge, Massachusetts. Policy makers ``need to monitor that situation closely.''

Signs of increasing prices compelled Bernanke and other Fed policy makers to signal in April they'll pause after reducing the benchmark interest rate by 3.25 percentage points since September. The Fed is trying to sustain economic growth and minimize harm from the collapse of the subprime mortgage market without impairing its credibility on inflation.

Bernanke's remarks focused on the differences between the U.S. economy now and in the 1970s. The combination of a housing slump and slow growth along with surging food and energy costs has prompted economists to resurrect the term ``stagflation,'' first used in the 1960s to describe a mix of slow growth and rising prices.

``The Fed's dilemma is obvious and there's a lot at stake,'' said Mickey Levy, chief economist at Bank of America Corp. in New York. ``To be consistent with its long-run inflation objectives, the Fed must eventually raise'' the real funds rate to at least 2 percent, he said.

Rate Outlook

Bernanke didn't comment on the outlook for monetary policy in his remarks. Traders anticipate the central bank will keep its benchmark rate at 2 percent at the next meeting on June 24- 25, futures prices show.

``Maintaining confidence in the Fed's commitment to price stability remains a top priority,'' Bernanke said. ``We see little indication today of the beginnings of a 1970s-style wage- price spiral.''

The consumer price index rose 3.9 percent for the year ending April, and expectations of inflation five years from now rose to 3.4 percent in May versus 3 percent in January, according to the Reuters/University of Michigan Survey.

``The overall inflation rate has averaged about 3.5 percent over the past four quarters, significantly higher than we would like but much less than the double-digit rates that inflation reached in the mid-1970s,'' Bernanke said.

Oil Prices

Crude oil futures reached a record $135.14 a barrel on May 22 and are up 27.5 percent year-to-date. Economists expect U.S. gross domestic product to rise by just 1.2 percent this year, according to a May Bloomberg News survey.

Compared with the 1970s, monetary policy today is committed to price stability, the economy is less energy dependent and is more flexible, Bernanke said.

``The silver lining of high energy prices is that they provide a powerful incentive for action'' promoting conservation and investment in energy-saving technologies, Bernanke said.

The Fed chairman noted that competition and economic flexibility have helped distribute technology throughout the economy. The result has been a rise in the U.S. rate of output per hour, or productivity, to about a 2.5 percent annual rate since 1995 versus about 1.5 percent in the two decades following 1973.

``The flood of innovation that helped spur the productivity resurgence has created many new job opportunities, and more than a few fortunes,'' Bernanke said. Economic inequality, which also rose during this period, can be mitigated by improved education and training for unemployed workers, he said.

`Wrong Direction'

Attempting to reduce inequality through ``approaches that inhibit the dynamism of our economy would clearly be a step in the wrong direction,'' Bernanke said. ``The better approach is to adopt policies that help those who are displaced by economic change.''

Fed officials have cut the benchmark lending rate 3.25 percentage points to 2 percent since September to spur lending and sustain economic growth. Lately, they have indicated they'll keep rates on hold because of concerns about inflation.

``For now, policy seems well positioned to promote moderate growth and price stability over time,'' Bernanke said in a speech yesterday.

Growth in service industries slowed less than forecast in May. The Institute for Supply Management said today its index of non-manufacturing businesses, which make up almost 90 percent of the economy, fell to 51.7 from 52 in April. Readings above 50 indicate expansion.