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Thursday, September 01, 2005

Federal Reserve Economists Warn Katrina Could Push Up Inflation

Federal Reserve economists warned today that the impact of Katrina, a supply shock, could be higher inflation. They believe the degree to which prices are affected, and hence the long-term inflationary outlook, depends upon the permanence of the shock:

Katrina seen pumping up US inflation in short run, by Alister Bull, Reuters:  Hurricane Katrina's impact on prices for gasoline and other commodities could boost U.S. inflation for several months, Federal Reserve economists said on Thursday, but the fallout will likely prove temporary. … "In the immediate future, this will show up as a big blip in CPI … But that is not relevant for long-term price stability in this county," said Robert Rasche, director of research at the St. Louis Federal Reserve. … The Fed … must weigh the impact on inflation, as well as what higher energy costs mean for consumption and growth, as it sets rates. … "Any time there is a disruption in the supply chain it is going to affect prices. But whether it is short-term or long-term is very hard to gauge," said Mike Chriszt, a senior economist at the Federal Reserve Bank of Atlanta, the regional Fed with primary oversight of the storm-struck region. "It depends on the ability of producers to pass on costs, and we're just not sure ...

In interpreting these remarks, note that Rasche does not see this event as fundamentally altering the long-term inflationary outlook.  Chriszt is more cautious and allows for the possibility that the long-term inflation rate could increase.  If so, we will find out how committed the Fed is to inflation targeting, particularly with markets widely anticipating a pause in the Fed's measured rate increases.

    Posted by on Thursday, September 1, 2005 at 03:06 PM in Economics, Monetary Policy | Permalink  TrackBack (1)  Comments (6)

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