Fed Keeping Close Eye On Inflation

Even though the once barreling U.S. economy is now slowing down, Federal Reserve Chairman Ben Bernanke on Monday called recent increases in inflation unwelcome and pledged to make sure surging energy prices don't make things worse.

In deciding the Federal Reserve's next rate move in late June, Bernanke said the inflation outlook "will receive particular scrutiny." Fed policymakers "will be vigilant" to ensure that the recent pattern of higher readings in core inflation — which excludes food and energy prices — "is not sustained," he said in remarks prepared for an international monetary conference here.

Other speakers included Jean-Claude Trichet, the head of the European Central Bank, and Toshiro Muto, deputy governor the Bank of Japan. Trichet said the economic recovery in the 12-nation euro currency zone was progressing and Muto said Japan's economy was expanding in a "balanced and sustained way."

On Wall Street, the Dow Jones industrials slid 160 points as Bernanke's fresh warnings on inflation rattled investors.

Bernanke offered his most extensive assessment of current economic conditions and the challenges facing Fed policymakers.

"With the economy now evidently in a period of transition, monetary policy must be conducted with great care and with close attention to the evolution of the economic outlook," Bernanke said.

So far this year, inflation at the consumer level has been elevated in large part by rising energy prices, Bernanke said.

As measured by the Consumer Price Index, "core" inflation rose at an annual rate of 3.2 percent over the last three months and 2.8 percent over the past six months. "These are unwelcome developments," he said.

Fed policymakers pay close attention to "core" inflation figures to get a better sense of how prices of lots of other goods and services are behaving. As these core measures have marched higher, economists have worried that surging energy prices are feeding into higher price tags for more and more items.

Oil prices, which hit a record high of more than $75 a barrel, are hovering around $73 a barrel. Gasoline prices have climbed, topping $3 a gallon in some areas.

To combat inflation, Fed policymakers have boosted interest rates 16 times since June 2004. The Fed, which meets next on June 28-29, has said that coming rate decisions will rely heavily on how barometers on economic activity and inflation look.

Some economists believe the Fed will raise rates again at that time to blunt inflation, and they thought Bernanke's remarks on Monday supported such a move. Others, however, think the Fed will leave rates alone, taking a pause in its two-year rate-raising campaign to assess economic conditions.

The economy, which grew at a brisk 5.3 percent pace in the opening quarter of this year, is slowing to a more moderate pace, Bernanke said. Higher energy prices are playing a role by making some consumers more cautious in their spending. Another factor is a cooling housing market, he said.

"The anticipated moderation of economic growth seems now to be under way," he declared.

Private economists believe economic growth in the April-to-June quarter will probably clock in around a 2.5 percent pace or slightly better.

Although consumers, who account for two-thirds of all economic activity, are showing signs of moderating their buying appetite, businesses are spending and investing at a robust clip, Bernanke noted.

He also pointed out that the slower job creation seen in recent months and an edging up in filings for unemployment benefits also are "consistent with the softening in the pace of overall economic activity that seems to be under way."

Employers added just 75,000 jobs in May, the fewest in seven months. Job gains for March and April turned out to be lower than previously thought.

Bernanke, who took the Fed helm on Feb. 1 after longtime chairman Alan Greenspan retired, has gotten off to a bumpy start in the way he has communicated with financial markets. And his resolve to fight inflation also has come to be questioned.

The Fed chief's remarks on Monday were partly aimed at sharpening his inflation-fighting credibility, some economists said.

"This is Bernanke flexing his inflation-fighting muscles," said Richard Yamarone, economist at Argus Research. Yamarone is among those predicting another rate increase in June.