Inflation Doesn't Worry Greenspan

Fed officials lowered the target to 1 percent, the lowest level since 1958, a year ago in part to stimulate the then-sluggish economic recovery by lowering business and household borrowing costs. But another big reason for the move was the officials' worries then that inflation was falling to such dangerously low levels that it might give way to deflation, an economically debilitating fall in the overall price level. Fed officials wanted inflation to rise.

A year later, the consumer price index is up, but the core index is still relatively low and well within the comfort range of many Fed officials. And with the economy now "growing in a solid fashion," Greenspan repeated that he views the current 1 percent target as providing "an increasingly unnecessary" degree of stimulus -- meaning that it is headed upward.

Greenspan said rising energy prices "could become a problem. I don't think we're there yet, but we're watching the situation, obviously, fairly closely."

Energy prices rose 4.6 percent last month, for a 15 percent increase over the 12 months that ended in May, the Labor Department reported. That compares with a 6.9 percent increase for all of 2003.

Transportation costs rose 1.7 percent in May, pushed up largely by an 8.1 percent rise in gasoline prices, the department said.

Average gasoline prices spiked last month to a peak of $2.05 for a gallon of unleaded regular, but have receded since then, dropping yesterday to $1.98, according to AAA's Web site.

Greenspan implied yesterday that he views rising energy prices as more threatening to other countries than to the U.S. economy. While energy costs are important to U.S. businesses, they are "extraordinarily important" to the United States' trading partners, he said, adding: "Anything which undermines the world economy -- and very high oil prices would do that -- would be a concern to us."

Food prices rose 0.9 percent last month, seasonally adjusted. Dairy prices rose 6.8 percent in May, accounting for about half of the May increase in grocery store food prices.

Fresh whole milk prices rose 14.7 percent in May, its largest monthly jump since July 1946 after the end of World War II price controls, the department said.

Some Fed officials have argued that the recent spurt of inflation is probably due to temporary factors and is likely to ebb. Others have made clear they are worried that prices may keep rising as the economy expands.

Greenspan said the Fed's "central focus is likely to be" on increases in businesses' costs of labor per unit of output, which account for more than two-thirds of non-farm business costs. Unit labor costs had declined for several quarters during the recovery, but turned up in the first three months of this year and appear to be rising in the current quarter.

While the Fed is "becoming increasingly disturbed by the recent upward drift in core inflation," it "still takes comfort in the relatively low level," Mickey D. Levy, chief economist for Banc of America Securities, said in a note to clients yesterday. The Fed "still perceives the flexibility to hike rates in a 'measured' fashion. A more dramatic rise in core inflation may push the Fed to tighten faster, but the May CPI report did not fall into that category."

Shelby and most other colleagues heaped praise and gratitude on Greenspan, predicting his swift confirmation.

Sen. Jim Bunning (R-Ky.) said he could not support Greenspan's renomination because he believes the Fed did not cut interest rates swiftly enough in 1992 and 2000. He also said Greenspan too often involves himself in policy matters outside the Fed's responsibility.

But Bunning also complimented the chairman for doing "a pretty good job" since January 2001 in a variety of ways.