Saturday, December 15, 2007

How Inflation Hobbles the Fed

From the Wall Street Journal:

Greenspan Calls Climate
'Tougher' Than He Faced;
Industrial Output Climbs

An unexpectedly large jump in consumer prices last month suggested inflationary pressures haven't receded, and the Federal Reserve may have less latitude than markets believe to lower interest rates to cushion the economy.

"This is a much tougher monetary-policy environment than anything I experienced," former Fed Chairman Alan Greenspan said in an interview Friday. He said the Fed has less leeway to cut rates than it did during the stock bust of 2001 because underlying inflation pressures are greater.

Mr. Greenspan made his comments after the Labor Department reported that overall consumer prices last month rose by a seasonally adjusted 0.8% from October, the largest monthly gain in two years. Prices rose 4.3% from a year earlier, the highest such jump since mid-2006.

Energy prices, which climbed 5.7% from October, accounted for more than two-thirds of the gain. Core consumer prices, which exclude food and energy, rose 0.3%, marking the biggest increase since January and exceeding the 0.2% that had been expected....MORE