There are signs that inflation is moderating, but a wary Federal Reserve Board isn't likely to adjust interest rates any time soon, according to testimony by Chairman Ben Bernanke
before the Senate Banking, Housing and Urban Affairs Committee on Wednesday.
"The monthly data are noisy," he said. "It will consequently be some time before we can be confident that underlying inflation is moderating as anticipated."
Core consumer price inflation has edged lower recently, due at least in part to lower energy prices. There are some indications that oil prices will remain well below last year's peak but "as we have been reminded only too well in recent years, the prices of oil and other commodities are notoriously difficult to predict and they remain a key source of uncertainty to the inflation outlook," he said.
The high level of resource utilization is also a concern. A tight labor market could accelerate wage increases and, ultimately, push up prices enough to nullify the buying power of increased compensation.
Bernanke said core inflation is forecast at 2-2.25 percent this year, dipping to 1.75-2 percent next year, but he stressed that policy makers are still mainly concerned that inflation won't moderate as expected.
Regarding the overall economy, he told Congress that it appears to be making a transition from the rapid rate of expansion experienced over the preceding several years to a more sustainable average growth pace.
Weakness in the housing market and slower appreciation of house prices doesn't seem to have significantly affected other sectors of the economy. Personal consumption, which accounts for more than two-thirds of aggregate demand, increased at an annual rate of about 2.5 percent during the second half of last year, matching the brisk pace of the previous there years. Consumer outlays were supported by strong gains in personal income due to increased employment and a pickup in the growth of real wages. Household finances appear generally solid, he said. Delinquency rates remain low for most types of consumer loans and residential mortgages. The labor market is expected to remain healthy and real incomes should continue to rise.
"The business sector remains in excellent financial condition, with strong growth in profits, liquid balance sheets and corporate leverage near historical lows," he said. Investment in high-tech equipment rose 9 percent last year. Spending on nonresidential structures increased rapidly through most of 2006 after several years of weakness. Business spending slowed toward the end of the year but is expected to expand at a moderate pace in 2007.
Economic activity among the country's major trading partners has continue to expand. Real exports grew approximately 9 percent last year. Bernanke said oil imports made the pattern of U.S. imports somewhat uneven but, on balance, import growth slowed to about 3 percent.
"Overall, the U.S. economy seems likely to expand at a moderate pace this year and next, with growth strengthening somewhat as the drag from housing diminishes," he said.