–Oil, Commodities Prices Not Necessarily ‘Precursor’ to Inflation
–Philly Mfgrs Starting to Pass Through Input Cost Hikes to Customers

By Claudia Hirsch

NEW YORK, April 14 (MNI) – Philadelphia Federal Reserve Bank
President Charles Plosser Thursday forecast a likely “transitory” impact
on the U.S. economy from supply-chain disruptions following Japans
March 11 earthquake and resultant power outages.

He also said that though manufacturers have recently begun to
pass through to customers their higher input costs, those oil and
commodity price increases arent necessarily a “precursor” to inflation.

“I do think it’s probably temporary,” Plosser said of the Japan
effect on the U.S. economy, speaking to reporters after a luncheon
address at a financial-reform conference hosted by the Levy Economics
Institute of Bard College. “Businesses around the world are pretty
adept. Once the supply chain gets disrupted, at some point they figure
out how to get what they need. For the world economy, and the U.S. in
particular, I think the effects are going to be transitory.”

Plosser, a voting member of the Feds policy-setting Open Market
Committee and an inflation hawk, said his own inflation expectations
have been “rising.”

“I’m not panicked,” he said, and added that it’s difficult to
detect how much of recent oil and commodities price increases are
“relative price shocks” and how much might indicate “actual inflation.”

“We have to be very careful not to get behind the curve here,” he
said. If the Fed waits too long to tighten monetary policy — in
whatever form that takes — then oil prices might “pass through to
everything else.”

Said Plosser: “The truth of the matter is it’s probably some of
both, but we don’t know how much.”

Indeed, the Philadelphia Fed president said, since November, some
manufacturers in his district have finally started feeding their own
cost increases to their customers.

“The (prices received) index isn’t as high as prices paid, but it’s
now at a pretty elevated level,” he said. “That might be an early
signal, if those pass-throughs start coming, that we might have trouble
with (inflation) expectations going forward.”

Plosser also said it’s imperative the Fed stay focused on
longer-term price trends than short-term vicissitudes.

“This is not about individual readings of oil or commodities. It’s
about how we read” inflation signals, he said. “Were not day traders,”
he said of the FOMC. “It’s very important for policy makers not to be
whipsawed, to be more stable.”

Plosser also told reporters the Fed may need to act to tighten
monetary policy this year. Though he views political upheaval in the
Middle East and North Africa and Japans natural disaster as having
limited impact on the U.S. economy, possibly confined only to the first
quarter of 2011, these issues may yet affect the schedule for the path
of monetary policy.

“It’s going to depend on the economy. It’s going to depend on how
these things play out,” he said, and added that the Fed must soon devise
and announce a detailed exit strategy from its unprecedented level of
monetary stimulus.

“I don’t think ‘trust us’ is a plan.”

In his prepared remarks, Plosser urged the Federal Reserve to adopt
an “explicit numerical objective” for inflation, something he’s long
supported. He said a price objective would bolster the U.S. monetary
policy framework by “anchoring inflation expectations, enhancing policy
transparency, and increasing central bank accountability for its
actions.” He noted that other major central banks already use such
goals, and said that it could serve as a useful tool while the Fed
navigates its exit from its so-called quantitative easing.

During audience questions, he said inflation targeting would reduce
the need to make short-term monetary policy adjustments. Asked if an
explicit target might wind up hastening a monetary-policy move, Plosser
was careful to note that any price objective would constitute a
“framework” for policy, not a “rule.”

He also said a “reasonable” horizon for inflation targeting would
be a minimum of two years.

Plosser said the swing over the past year from public concern about
deflation to current fear of widespread inflation suggests to him that
the publics confidence in the Feds commitment to price stability may
be faltering.

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