Thursday, January 3, 2008

inflaiton risk

--Mr. Greenspan, who retired last year, said in a recent interview that inflation risks are much greater today than in 2001 and thus his successor, Ben Bernanke, has less freedom to shore up the economy with steep rate cuts than he did. "This is a much tougher monetary-policy environment than anything I experienced," he said. --The most obvious inflationary threat is from oil. It has risen to almost $100 a barrel now from $61 at the end of 2006. That has sent the 12-month overall inflation rate up sharply, to 4.3% in November. By contrast, oil hovered just at just less than $30 for most of 2001 before sinking after the Sept. 11 terrorist attacks, and inflation ended the year at 1.6%. --Perhaps the most important contrast with 2001 is one that gets little attention. Back then, the Greenspan-led Fed was optimistic that the spread of new technology had boosted worker productivity growth and thus the speed at which the economy could grow without bumping up against capacity constraints. Fed staff that June put the economy's noninflationary "potential growth" rate at 3.4%. --Since then, slower growth in both productivity and the labor force has led Fed policy makers to put potential growth at only about 2.5%. Thus, inflationary bottlenecks could develop at much more moderate growth rates than they did in 2001.

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