Banker rejects inflation analysis

By Andrew Balls in Washington
Anthony Santomero, the president of the Federal Reserve Bank of Philadelphia, yesterday rejected warnings that rising commodity prices were a significant threat to US inflation, while inflation expectations in the US remained controlled.
“For commodity prices to increase the rate of inflation on asustained basis, they would have to rise continuously and represent a significant component of the total cost of final goods and services,” he said.

“In fact, commodity price pressure is rarely sustained and often reversed, and commodities represent a relatively small share of final product costs.”
Labour costs account for more than two-thirds of the total costs of US businesses. Unit labour costs declined in 2002 and 2003 but rose a 0.5 per cent annualised rate in the first quarter. However, some economists expect that upward revisions to output will mean a downward revision for unit labour costs.
The Fed will move interest rates from 1 per cent to a neutral level at a measured pace, but will aim to return rates to neutral “several quarters before the economy settles on to the sustainable growth path”, Mr Santomero said. He warned that rapid technological change could mean that traditional indicators overestimated the output gap.
Moreover technological change might have raised the structural rate of unemployment, owing to the need for out-of-work people to retrain.
Mr Santomero said that the most significant risk of increased inflationary pressure in the US was not from commodity price movements but instead from the labour market and the possibility of rising inflation expectations.
Source: Financial Times

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