Inflation has ex-Fed chief Volcker worried

WASHINGTON: Paul Volcker, who halted a wage and price spiral as Federal Reserve chairman between 1979 and 1987, said he’s worried both about inflation and pressure on the US central bank to not do anything about it.

“I am a little bit more worried about inflation,” said Mr Volcker, 79, speaking at a discussion sponsored by the Women’s Economic Round Table in New York on Monday. Gerald Corrigan, who served as New York Fed president from 1985 to 1993, said he shared Volcker’s concerns.

While the inflation rate isn’t “high” or “running away”, Mr Volcker said, “it is kind of creeping up, and I am impressed by the degree of pressure, if that is the right word — psychological pressure, political pressure — there is not to do anything about it.”

Mr Volcker’s comments come as the Fed under Chairman Ben S Bernanke, 52, has held interest rates steady at the past two meetings, a pause that followed 17 consecutive rate hikes since June ’04. Still, inflation has been at or above the present Fed chief’s own numeric benchmark since April ’04, a sign of the unusual tolerance the central bank has shown toward price increases as it tries to balance a sharp slowdown in housing that risks weakening consumer spending.

“Time will tell whether watching and waiting was the correct policy response,” said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi UFJ in New York. “A warning on inflation-creep by the man who tamed inflation could make some policy makers nervous.”

“A lot of people out there on Wall Street, and on Main Street, are operating on the assumption that that nothing very startling will happen in terms of restraint” on inflationary pressures, said Mr Volcker. “That is reflected in attitudes pretty broadly. But once people are convinced that that’s the case, it can creep up and the more it creeps on you the more difficult it becomes to do something about it.”

Commenting on deflation in Japan, following the collapse of stock and real estate markets, Mr Volcker said, “We live in this peculiar world where 3% inflation is stability but a half percent decline in the price index is deflation. I am not quite up with modern nomenclature.”

The Fed’s preferred inflation measure, the personal consumption expenditures price index minus food and energy, rose 2.4% for the 12 months ended in July. The central bank left the benchmark rate at 5.25% on September 20, and said in its statement that “inflation pressures seem likely to moderate over time.”

Mr Bernanke has said in past speeches, when he was a Fed governor from ’02 to ’05, his comfort zone for inflation is around 1 to 2% a year measured by the so-called core personal consumption expenditures index.

Fed officials have said in public speeches that they are more concerned about price increases than an economic slowdown. Still, they are betting on a forecast that receding energy prices and cooling housing markets will restrain demand enough to eventually bring down inflation.

Prices of existing homes in the US fell for the first time in 11 years as sales declined to the lowest level since early ’04, the National Association of Realtors said on Monday in Washington. The median price of a previously owned home dropped 1.7% in August from the same month last year, it said.