Bernanke: Inflation Persists

Inflation has been surprisingly persistent this year due to surging energy prices, but the core rate should decline in the near future, Ben Bernanke told Congress Wednesday.

"The FOMC projections, which now anticipate slightly lower growth in real output and higher core inflation than expected in our February report, mirror the somewhat more adverse circumstances facing our economy, which have resulted from the recent steep run-up in energy costs and higher-than-expected inflation more generally.

"But they also reflect our assessment that, with appropriate monetary policy and in the absence of significant unforeseen developments, the economy should continue to expand at a solid and sustainable pace and core inflation should decline from its recent level over the medium-term," Bernanke said.

In prepared testimony to the House, the Federal Reserve chairman also noted that wage inflation has been moderate this year, helping relieve pressure on the cost side of the inflation equation. Nevertheless, some inflation pressure has persisted.

"The pickup in inflation so far this year has ... been reflected in the prices of a range of non-energy goods and services, as strengthening demand may have given firms more ability to pass energy and other costs through to consumers," Bernanke said. "In addition, increases in residential rents, as well as in the imputed rent on owner-occupied homes, have recently contributed to higher core inflation."

Bernanke reiterated the Fed's pledge to base future interest-rate policy on incoming economic data, while emphasizing that policymakers must be aware of a possible "lag time" between rate hikes and their impact on the economy.

"Because economic forecasting is far from a precise science, we have no choice but to regard all our forecasts as provisional and subject to revision as the facts demand," Bernanke said.

"Thus, policy must be flexible and ready to adjust to changes in economic projections. In particular, as the Committee noted in the statement issued after its June meeting, the extent and timing of any additional firming that may be needed to address inflation risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by our analysis of the incoming information."

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