Chairman Ben Bernanke said Monday that core inflation in the U.S. economy is at or above an acceptable ceiling, even as signs of an economic slowdown multiply.
In remarks at a Washington monetary conference, Bernanke noted that core inflation as measured by the consumer price index was 3.2% over the last three months and 2.8% over the last six months. As measured by the price index of the personal consumption expenditures report, core inflation is up 3% over three months and 2.3% over six, he said.
"These are unwelcome developments," Bernanke said.
The comments were viewed ominously in financial markets, because the Fed recently vowed to base interest rate decisions on incoming economic data. Stocks extended a sharp decline in the aftermath of the comments, while the yield on the 10-year note moved to 5.02% from 5%.
"While monthly inflation data are volatile, core inflation measured over the past three to six months has reached a level that, if sustained, would be at or above the upper end of the range that many economists, including myself, would consider consistent with price stability and the promotion of maximum long-run growth," Bernanke said.
On the issue of wage inflation, Bernanke noted that productivity has held down unit labor costs for years, but suggested the job market might be getting over-extended.
"Anecdotal reports suggest ... that the labor market is tight in some industries and occupations and that employers are having difficulty attracting certain types of skilled workers," he noted.
The Fed chairman also said that inflation expectations might be growing.
"Some survey-based measures of longer-term inflation expectations have edged up, on net, in recent months, as has the compensation for inflation and inflation risk implied by yields on nominal and inflation-indexed government debt," he said. "As yet, these expectations measures have remained within the ranges in which they have fluctuated in recent years, but these developments bear watching."
Bernanke said the economy has entered a "period of transition" where, after three years of robust growth, capacity slack has narrowed and "a sustainable, non-inflationary expansion is likely to involve some moderation in the growth of economic activity to a rate more consistent with the expansion of the nation's underlying productive capacity."
"Real gross domestic product grew rapidly in the first quarter of this year, but the anticipated moderation of economic growth seems now to be under way. Consumer spending, which makes up more than two-thirds of total spending, has decelerated noticeably in recent months. "