Federal Reserve Chairman Alan Greenspan yesterday played down inflation concerns after a government report showed consumer prices rose in May at the fastest monthly rate in more than three years.
The consumer price index, the most widely followed inflation measure, rose by a seasonally adjusted 0.6 percent in May, primarily because of climbing energy and food prices, the Labor Department reported.
But after stripping out volatile food and energy costs, the so-called core CPI rose just 0.2 percent last month, and by a low 1.7 percent in the 12 months that ended in May.
Greenspan, speaking during a Senate Banking, Housing and Urban Affairs Committee hearing on his nomination for a fifth term as chairman, indicated that the central bank continues to believe it can raise interest rates gradually in coming months because inflation is likely to remain tame. The first increase is widely expected to come at the next Fed meeting June 29-30.
But Greenspan also made clear that Fed officials are prepared to raise rates more quickly if their forecasts turn out to be wrong.
"Our general view is that inflationary pressures are not likely to be a serious concern in the period ahead," he said in response to a question from committee Chairman Sen. Richard C. Shelby (R-Ala.).
Greenspan recalled that Fed policymakers said in a statement after their last meeting in early May that they believed that they likely would raise their target for a key short-term interest rate at a "measured" pace.
Analysts have interpreted "measured" to mean the Fed expects to raise the target in quarter- or half-point steps over many months or several years. Greenspan said yesterday that the pace of increases still "is very likely to be measured over the quarters ahead."
"But, clearly this is our general view of the outlook, and forecasts are subject to error," he added. "And if our judgment as to how the economy is going to evolve and how inflation is going to evolve turns out to be mistaken, we will change" in order to keep inflation under control.
Greenspan's comments further reinforced analysts' expectations that the Fed will raise its benchmark federal funds rate, the rate charged between banks on overnight loans, to 1.25 percent from 1 percent at the next policymaking meeting in two weeks. That would be the first increase in the target in four years, and the first change in a year.
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.