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Inflation warning signs not yet worrying Fed

Bernanke expects slow recovery to keep prices down

One reason inflation will remain low for the next year or two, analysts say, is shoppers have become budget-conscious, leaving retailers no choice but to try to hold down prices. One reason inflation will remain low for the next year or two, analysts say, is shoppers have become budget-conscious, leaving retailers no choice but to try to hold down prices. (Paul Sukuma/Associated Press)
By Martin Crutsinger
Associated Press / December 16, 2009

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WASHINGTON - The economy flashed a warning sign about inflation yesterday, but the recovery is so fragile that specialists say a worst-case scenario of runaway prices and higher interest rates is a long way off, if it happens at all.

While the Federal Reserve is all but certain to take up the prospect of inflation at its meeting this week, no one expects policy makers to raise interest rates anytime soon to fight the threat. Rates have been at record lows to nudge the recovery along.

Even if the Fed did decide to raise rates later, there would be risks: Borrowing money would be more expensive, squeezing corporate profits, and stock prices could fall - all of it threatening to derail the recovery.

The Fed’s chairman, Ben Bernanke, has repeated his belief that slack in the economy - meaning idle plants and the weak job market - will hold back price increases.

Those factors should “contribute to the maintenance of low inflation in the period ahead,’’ Bernanke wrote in a letter released yesterday in response to questions from Senator Jim Bunning, Republican from Kentucky.

“The bulk of evidence indicates that resource slack is now substantial.’’

The economy is growing steadily, but slowly. The latest sign was a report that industrial production rose a better-than-expected 0.8 percent in November. Factories, mines, and utilities are also using more of their plants as the recovery takes hold.

Still, they are not using nearly as much of their production capacity as they do in normal economic times. The abundance of spare capacity and such soft demand are two more reasons inflation will probably remain tame.

Overall, wholesale prices jumped 1.8 percent in November, the Labor Department said. That was more than double the gain analysts had expected. Core inflation, which excludes energy and food, rose 0.5 percent, the sharpest increase in over a year.

That’s still not as scary as it may seem as an indicator of inflation. Much of the increase reflects a jump in energy prices, which will probably reverse itself. Oil prices are already down about 10 percent this month.

Even without considering energy, the higher prices were driven by light trucks becoming more expensive, which may be a temporary factor reflecting a shift to 2010 models.

“Inflation for the next year or two really will not be a problem in the United States,’’ said Nariman Behravesh, chief economist at IHS Global Insight.

Behravesh predicted the Fed would not begin raising interest rates until next fall.

“The recovery is still going to be pretty lackluster and somewhat fragile,’’ he said. “The Fed is not going to do anything to upset the apple cart at a time when inflationary pressures remain very muted.’’

One reason is that shoppers are so budget-conscious that retailers have no choice but to keep prices down.

The Kroger grocery chain, for example, posted a lower quarterly profit in part because it’s had to cut prices to compete - even as its own costs have risen. And electronics chain Best Buy predicted yesterday that its profits will be squeezed as shoppers veer toward cheaper laptops and TVs.

Higher prices at the gas pump have also proved unsustainable. Valero Energy Corp., the nation’s largest oil refiner, shuttered a major refinery over the summer and plans to close another.

The price of crude oil has risen this year, but refiners have not been able to pass the costs along, because millions of people have lost jobs and no longer commute. That has helped to drive down demand for gasoline.

Retail gas prices peaked at $2.69 in late October.