Fed Sites High Energy Prices as Drain on Economy

High energy prices have sapped consumer and business spending and depressed economic growth by as much as 1 percent since energy prices began to rise in late-2003, according to Federal Reserve Chairman Ben Bernanke.

Bernanke sees that high energy prices have had a small effect on non-energy prices and would not spark rapid inflation as long as the Fed stays on top of its game. The statements were in a letter written to Rep. J. Gresham Barrett in response to a question after a recent hearing.  It's the most explicit Bernanke has been on the impact of rising energy costs since taking over as Fed chairman at the end of January.

Bernanke's opinion on energy prices is important. If he and his Fed colleagues view the run-up in energy prices as a drain on the economy, not as an inflation spark, policymakers could lean toward holding interest rates steady in a bid to support the economy rather than raising them to curb inflation.  "The surge in energy prices since late-2003 has significantly reduced the purchasing power of households and decreased the profits of non-energy firms, thereby restraining both consumer spending and business investment," Bernanke stated.  He said the increased energy prices have reduced gross domestic product growth between half a percentage point and a full percentage point per year since late-2003.  GDP rose 2.7% in 2003, 4.2% in 2004 and 3.5% in 2005.

Bernanke said energy prices so far have had a "relatively modest" impact on core inflation, which excludes more volatile energy and food costs. "In the longer run, these inflation effects should fade even if energy prices remain elevated, so long as monetary policy keeps inflation expectations well-anchored," Bernanke wrote.