Fed’s Williams: US not facing runaway inflation

LOS ANGELES—The United States is not heading into a sustained bout of high inflation, a top Federal Reserve Bank official said yesterday, despite a recent surge in energy and food prices that is sparking fears of 1970s-style price rises. While sharp commodities price rises are a “serious concern,” prices of some like sugar and cotton are already starting to fall, and slow wage growth is acting as a brake on broader inflation, San Francisco Fed President John Williams told a Town Hall Los Angeles meeting in his first public comments since his appointment March 1.

Commodity costs make up only a small fraction of the price of most goods, and households see the current inflation bulge as transitory, he said. Those factors mean inflation will likely peak mid-year and then recede, returning by next year to about 1.25 per cent to 1.5 per cent, he said. The Fed’s informal inflation target is 2 per cent target. “The economy today faces many pitfalls, but I don’t believe that runaway inflation is one of them,” Williams said in remarks prepared for delivery. “The risk of a sustained period of high inflation is low.”
Williams’ remarks were in line with expectations for dovish policy views from the Fed’s newest policymaker, and with the views of Fed Chairman Ben Bernanke, who has also said commodities price rises are transitory and do not merit a reversal of the Fed’s super-easy monetary policy.

The Fed has kept interest rates near zero since December 2008 and is nearing completion of a bond-buying program that will add a total of US$2.3 trillion in long-term assets to the Fed's balance sheet. The policies have helped reduce high unemployment and kept the economy from falling into deflation, Williams said.
They are not the cause of sharply higher world commodity price rises, he said. The real culprit is rising demand for materials and fuel from growing emerging economies, and fears of supply disruptions as political turmoil grips nations in North Africa and the Middle East, he said. Economic recovery has been disappointingly slow, with high gas prices dragging on household spending and recent economic data lackluster. But it has now become self-reinforcing, with “enough forward momentum to overcome these stiff headwinds,” he said. (Reuters)