According to the Times, U.S. inflation hit a 27 year high in June:
Inflation jumped by 0.8 per cent in the month of June, the most since February 1981, when prices rose by 1.0 per cent, according to the Commerce Department.
Bloomberg reports today that while the Fed will likely keep interest rates unchanged for now, Bernanke is facing a dissenting block of 3 governors who are arguing for more action against inflation.
The fastest inflation in 17 years adds to the risk that three members of the Federal Open Market Committee will dissent for the first time since 1992. Gary Stern, president of the Fed’s Minneapolis bank, and the Philadelphia Fed’s Charles Plosser joined Dallas’s Richard Fisher since the last meeting in June in calling for an increase in rates to limit price increases.
The trio wield more clout than usual because two seats assigned to Fed governors on the 12-member panel are currently vacant.
According to the article, this may result in Bernanke talking tougher about inflation in his official statements.
Personally, I’m a little skeptical that this means much. Talk is cheap. Even Fed-speak. Bernanke has talked tough about inflation ever since he assumed the chairmanship. Yet he has allowed inflation to rise to the current stunning levels. Inflation, even core inflation that excludes food and energy (i.e. the things that have been rising the most in recent years), has consistently exceeded Bernanke’s stated targets, but his actions have been few. While admittedly he is in a tough position right now, his actions in the past year have demonstrated that when push comes to shove, he is willing to sacrifice inflation to pursue other goals, all the while paying lip service to being an inflation hawk.
Furthermore, while 3 governors openly dissenting may have been rare during Greenspan’s term, Bernanke is apparently genuinely interested in fostering open discussion among the governors. From Bloomberg:
Bernanke may be willing to accommodate dissent. Bernanke has praised the Bank of England, whose chief, Mervyn King, has been outvoted twice on rates, as a “leading exponent of increased transparency.”
Bernanke has also opened up FOMC meetings to allow officials to speak out of turn during debates. That means the sessions may resemble the frank exchange of conflicting views common to Bernanke’s discussions during 23 years as an economics professor, said Edward McKelvey, a senior U.S. economist at Goldman Sachs Group Inc.
In 20 FOMC interest-rate decisions as chairman, Bernanke has recorded nine with one dissenting vote and two with a pair of `nays.’ His predecessor, Alan Greenspan, had 17 decisions with one or two dissents in his last 10 years as Fed chief.
Thus, having 3 governors dissenting may not be indicative of all that much more dissent than usual. For any professional Fed-watchers out there: does this really mean there is true dissension in the ranks that might actually force action on inflation that is rapidly approaching the ’70s era we all have nightmares about? Or is this another good P.R. move to appease the inflation hawks with empty words while pursuing other goals?
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Others are raising their voices also:
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Lies, Damned Lies and Inflation Statistics
Developing countries like China are infamous for fudging economic stats, but in reality, lying about inflation is as American as baseball.
Academic economists have long grumbled about the unreliability of official inflation data, but the belief that things are worse than governments are willing to admit is trickling down from the ivory tower. Even Charles Bean, the new deputy governor of the Bank of England, has publicly criticized central bankers’ use of “core inflation” data, which disregards food and energy prices, in setting policy. When “non-core” items like gas and cereal rise so much that consumers have little cash to spend on anything but those essentials, it’s hard to ignore.
The temptation to fudge numbers is one that bureaucrats worldwide find hard to resist. In Argentina, where government reassurances about single-digit inflation have long seemed unconnected to consumer reality, revamping the government statistics office became an issue in the last national election. In China, where data based on the prices for state-provided goods and services are increasingly irrelevant in a privatizing economy, the stats are so out of whack that Goldman Sachs has resorted to a movie-review-style system to rank the quality of official data on a scale from one to five. But the habit of playing fast and loose with numbers isn’t native to the developing countries where high inflation reigns. Indeed, the popular “core inflation” method for measuring changes in consumer prices is actually as all-American as Enron’s accounting practices.
Full article