"Ben Bernanke held the first postpolicy-meeting news conference by a Federal Reserve chairman in part to bolster confidence that the Fed remained committed to controlling inflation. The words "inflation expectations," or some variation of them, were uttered 21 times in the session.
While investors and the public have concerns about short-term price increases, they appear to have confidence in Mr. Bernanke's ability to control inflation over the long-term. That is crucial to the Fed's success in rebooting the economy, because once higher long-term inflation expectations take root, they can become self-perpetuating, which would mean higher interest rates that could slow growth.
/
Long-term inflation-expectation gauges, from consumers and from the bond market, remain subdued and are little changed from a year ago. They point to inflation that isn't far above the average of the past decade, when inflation was historically low.
One rough gauge of future inflation expectations is the gap between yields on plain-vanilla Treasury bonds and Treasury inflation-protected securities of the same maturity.
TIPS are regularly adjusted for inflation, so this gap in yields, called the break-even inflation rate, shows how much future interest traders are willing to give up for inflation protection, which can be interpreted as the future inflation rate they expect.
The 10-year break-even inflation rate earlier this month surged to 2.66%, the highest since 2006. Amid a host of downbeat economic data in recently, that rate has retreated to less than 2.6%. These numbers are relatively high in the short history of break-even inflation rates, but that period was one of historically low inflation.
/
Many economists, likely including those at the Fed, doubt longer-term inflation pressures can take hold with unemployment still near 9%. The Labor Department on Thursday reported a jump in weekly jobless claims, which have started drifting higher again, a sign of lingering job-market weakness.
"The prospect of a wage-price spiral is much less than the prospect of a sharper slowdown in the economy," said Bernard Baumohl, chief global economist at the Economic Outlook Group in Princeton, N.J.
