Federal Reserve Vice-Chairman Janet Yellen and European Central Bank Vice-President Vitor Constancio said they’ll act to prevent any surge in inflation sparked by rising oil prices.
The Fed won’t “sit by” if higher oil prices are passed through to other costs, Yellen said in New York. Constancio said the ECB “must be willing to be preemptive” to combat a greater spread of inflation “if need be.” The officials appeared together on a panel discussion.
Yellen and Constancio didn’t say whether they’ll act soon to control prices as Muammar Gaddafi struggles to retain power in Libya, Africa’s third-biggest oil producer. The Fed and ECB diverged in their response to a rise in oil prices in 2008, with European policy makers raising their benchmark interest rate and the Americans holding off.
If there is “an oil price shock and that does lead to inflation expectations moving up, what would happen is core inflation would move up to headline inflation,” said Bank of England Deputy Governor, Charles Bean, who was also on the panel. The event was hosted by the University of Chicago’s Booth School of Business.
Crude oil rose 14 per cent in its biggest weekly gain in two years on concern the turmoil that has cut Libya’s output may spread to other parts of the region. Futures in New York surged to a 29-month intraday high.
Core inflation excludes food and energy prices. The Fed prefers to monitor core inflation in the short term as a more reliable gauge that limits effects from fluctuations in more- volatile commodity prices. The ECB targets keeping overall inflation in the 17-nation euro region below, but close to, 2 per cent.
“The general feeling of the panelists was the appropriate policy is not to react, and wait for evidence of inflation to show up in wages or passing through to core,” said Peter Hooper, an economist at Deutsche Bank Securities Inc in New York. “Inflation risk, they think, is still pretty low.” The US central bank is watching inflation expectations “very closely,” and is monitoring the impact of rising commodity prices, Yellen said in response to audience questions after a speech. The Fed has had “the luxury over a number of years” of not seeing surging oil prices pass through to core inflation, said Yellen, who didn’t give new information about the outlook for the economy or monetary policy in her speech.
“It’s something we need to be very focused on, and any increase that would seem to be sustained in inflation expectations or in core inflation” would “really demand a response,” she said. “We couldn’t sit by.”
The ECB “cannot allow inflation to be embedded,” said Constancio. Central banks should not react immediately to supply shocks as they do not always portend a spread of inflation, though they should “be ultra vigilant.”
