San Fran Fed's Parry sees inflation risks building
By Michael Kahn
SAN FRANCISCO, Aug 11 (Reuters) - The U.S. economy has so far warded off inflation but conditions that could lead to an uptick in prices are on the rise, Federal Reserve Bank of San Francisco President Robert Parry said on Wednesday.
Strong U.S. consumer spending, low unemployment and an economic recovery overseas are increasing the potential for inflation, Parry said in a speech to the Commercial Real Estate Women professional group in San Francisco, Parry said.
"There are risks for future U.S. inflation given the improved prospects abroad, continued rapid growth in domestic demand and tight labor markets," Parry said.
"We'll be especially alert to developments that indicate the emergence of increased inflation or inflationary risks for the future," he added.
The regional Fed president described U.S. economic performance in recent years as remarkable, saying gross domestic product growth averaging just under 4.0 percent is a "phenomenal pace."
But central bankers have been concerned for some time that inflation would not remain low much longer given the rapid rate of growth and falling unemployment, Parry said.
"Throughout this period, the Fed has been keeping a close watch on demand -- both here in the U.S. and abroad -- because it is key to the outlook for inflation."
He said he was not sure whether the recent jump seen in labor cost data was a new trend or just a temporary blip.
Inflation concerns heightened with the waning of a global economic crisis from 1997-1998 that had helped keep U.S. inflation in check. Low demand overseas had pushed commodity prices down worldwide and created more slack in U.S. manufacturing capacity.
"But with improved prospects for recovery abroad, we can't expect this to help as much on the inflation front going forward," Parry said.
He noted commodity and oil prices are rising while South Korea moves out of recession and Japan is making progress on addressing its problems. Brazil's economy is also improving.
"When we combine strong domestic demand with a pickup in demand from recovering economies abroad, the risk of inflationary pressure begins to build," Parry said.
A continuation of the faster productivity growth seen over the past two years is one development that could help keep U.S. inflation at bay but Parry said the Fed was still unsure whether it can be sustained.
He also said Japan and Korea have taken some positive steps in trying to bounce back from the Asian financial crisis, though they need to remain committed to reform.
"There have been some fundamental changes in Korea and Japan that look positive to me and I hope they follow through," Parry said.
Parry also said the recent widening of spreads between U.S. Treasuries and riskier debt securities could signal concern about the U.S. economic outlook.
"It might reflect some greater uncertainties about the economic outcome," he said. |
