US Fed Chair Bernanke cites energy costs as inflation risk

US Fed Chair Bernanke cites energy costs as inflation risk

New York (Platts)--19Jul2006

US Federal Reserve Board Chairman Ben S. Bernanke, in his semi-annual
monetary policy report to Congress, said that while US inflation expectations
remained contained, rising energy and non-energy commodity prices increased
the risk of upward pressure.

Throughout his testimony, Bernanke highlighted the role of rising energy
prices in boosting the outlook for inflation. "Higher prices for crude oil
contributed to a further run-up in domestic energy costs; this years
increases, combined with the steep increases in 2004 and 2005, not only
boosted the prices of gasoline and heating fuel but also put upward pressure
on the costs of production for a broad range of goods and services," Bernanke
said.

Productivity gains and only moderate increases in labor costs have
couteracted the upward pressure from energy costs, keeping inflation
expectations in check.

The Federal Open Market Committee has hiked the federal funds rate 17
times since the middle of 2004, boosting the key US interest rate from 1% to
5.25%, in an attempt to moderate inflation. Bernanke said that the FOMC
continued to eye upside inflation risks following its latest meeting in June,
but "the FOMC made clear that the extent and timing of any additional firming
needed to address those risks will depend on the evolution of the outlook for
both inflation and economic growth as implied by incoming information."

Bernanke said the Fed projected US real GDP to moderate to 3.25-3.5%
during 2006 and 3-3.25% in 2007, from 3.6% during the first quarter of 2006.
Unemployment was expected at 4.75-5% during the fourth quarter of 2006 and
would remain at that level through 2007. He suggested that "over time,
pressures on inflation should abate as the pace of real activity moderates
and, as futures markets suggest, the prices of energy and other commodities
roughly stabilize."

However, "regarding inflation, the margin between production and
consumption of crude oil worldwide is quite narrow, and oil markets are
especially sensitive to news about the balance of supply and demand and to
geopolitical events with the potential to affect that balance; adverse
developments could result in yet another surge in energy costs."

The rise in energy prices has been focused in petroleum products markets,
Bernanke said, in part due to the switchover from using MTBE to ethanol as a
gasoline additive. "Retail prices of gasoline this year have risen faster than
the cost of crude oil in part because of the additional cost of producing and
distributing reformulated product with ethanol."

The rising costs of energy has begun to be seen in the costs of producing
finished goods, showing up in the rising prices of inputs used for production.
However, quantifying the extent of the impact of higher energy costs is
difficult, Bernanke added, "in part because it is diffused through a wide
range of retail goods and services."

--Dave Marino, david_marino@platts.com

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