Finding Inflation in a Few Words

I am no economist, but sometimes I feel I have to try to understand the murky world of this monetary discipline in order to figure out what's next for my grocery budget.  On Wednesday the chairman of the Federal Reserve, Ben Bernanke, will hold a news conference and the world will be hanging on every word.  Bernanke and his group of financial wizards have the power to raise or lower the basic interest rates banks pay to borrow money.  What he does affects the cost of money and that affects nearly everything else.

 One of the reasons Bernanke might consider raising interest rates is if he thinks there is inflation.  Inflation means prices are going up.  So, it's pretty clear we have inflation because the price of gasoline is skyrocketing and so has the price of food.  In fact, the CEO of Kroger Grocery Stores says he expects an even sharper increase in food prices in the next six months.  Food prices, overall, have already jumped nearly 2 percent.  We are seeing it at the supermarkets, but we are also noticing price hikes at restaurants and fast-food stores, too.  With wages going down and prices going up, people are finding it difficult enough to make ends meet.  So, inflation is here and the Fed has to act, right?  Maybe, not.

 When you watch Bernanke at his press conference on Wednesday, listen for the word inflation.  If it is preceded by the word “core”, then don't expect any relief.  Core inflation is the rising prices of bigger ticket things like appliances, TV set, cars, commercial air conditioners.  The way to get those things sold would be to keep interest rates low.  Republicans are now arguing that the economy is so tight right now that the Federal Reserve must change the way it calculates inflation and include things like food and gasoline.  So that's what we need to watch for.

 If Bernanke sticks to the old formula using “core” inflation and refuses to face the pain most Americans are feeling at the check out counter and the gasoline pumps, then he will not raise basic interest rates.   If he begins to see that the old formula may not be the right one for this economic crisis and he recognizes rising inflation, then he will hint that interest rates might jump.  If that happens the markets will react and the banks will jitter, and Republicans say, the economy will start to break out of its' cocoon. Democrats are staying quiet.  They don't want to be branded with the scarlet letter of inflation.  For them the status quo is the politically correct thing to do.

 Of course, this is all too simple.  One news conference or one change in policy will not fix the current economic crisis, but as we watch what Ben Bernanke says lets be aware that his words mean a lot.  They could affect what you pay for milk at the grocery store in the next six months. 

Categories: Becker’s Digital Notebook