FED WATCH: NY Fed Chief's iPad 2 Comment Irks Queens Audience 03/11 04:12 PM
NEW YORK (Dow Jones)--The iPad 2 may prove golden for computer maker Apple Inc. (AAPL:$351.99,00$5.32,001.53%) , but, for one Federal Reserve official, its invocation was a lead balloon.
New York Fed President William Dudley on Friday cited the new improved tablet as an example of the economy's dearth of upward inflation pressures. But for a Queens, N.Y., audience more worried about the price of food, that didn't go down so well.
The central banker hit the iceberg when he was trying to defend his belief-- one shared by many private-sector economists--that underlying inflation in the U.S. economy is low despite a worrisome surge in commodity prices which Dudley said the Fed would be "unwise" to overreact to. The grief Dudley got indicates the Fed is facing a growing gulf between how it and the public at large perceives inflation. If this disconnect widens, it could risk undoing the public's confidence that the Fed will be able to keep price pressures at bay.
Dudley's day went south when he was pressed by several audience members about how he can view inflation as low when things such as grocery prices are marching higher. One participant asked "when was the last time, sir, you went grocery shopping?"
The central banker told the audience "I certainly acknowledge food prices have gone up." But he added some prices are lower and noted "Today you can buy an iPad 2 that costs the same as an iPad 1, that's twice as powerful," as an example of favorable price dynamics. His example was greeted with widespread grumbling in the audience, in a display of conspicuous discontent unusual for a Fed speaking event.
Most economists agree that Dudley, a former chief economist for Goldman Sachs Group Inc. (GS:$160.6800,$0.4100,0.26%) , spoke accurately. The problem is what appears to be a growing disconnect between the views held by the economics profession, and those held by the general public. Indeed, the march higher of these "highly visible" prices may bring about an unraveling in what are now rather low core-inflation readings.
There is even some evidence the Fed is already starting to lose the argument. On Friday, the University of Michigan's preliminary one-year inflation- expectations reading took a big jump higher to 4.6%, from 3.4% the month before, while the five-year reading moved to 3.2%, to 2.9%. Sentiment readings are mushy things, but Fed officials believe they do play an important role in shaping actual inflation, so the trajectory here is worrisome, especially if commodity prices continue to jump higher.
Many economists agree that food and energy prices are likely to face a future of persistent increases due to rising growth in emerging economies. Unpredictable supply and political shocks stand only to make the situation worse. "We expect spikes in food prices to occur with increasing frequency, mostly due to weather disruption and climate change," Deutsche Bank economists warned in a recent note. They see the most recent surge as somewhat temporary, but noted that food prices "will remain high for the rest of this decade."
Fed officials will likely be inclined to dismiss these price increases, much as they have already done. They have already noted that food and energy prices play a diminished role in the economy relative to the past, and that these prices, while significant, must be weighed against a whole universe of prices, many of which are steady or even falling.
University of Oregon economics professor Mark Thoma said a sustained rise in commodity prices isn't something the Fed can do much about. If prices rise for a sustained period because of legitimate demand, "it's not what we think of as inflation" and it isn't something monetary policy can do much about, Thoma noted. While it is true that the Fed may try to smooth out short-term fluctuations in these sort of prices, over the long haul, sustained commodity price gains are largely beyond the remedy of monetary policy, he said.
That said, the Fed will be "blamed" for these price increases, because the economics of the issue is "an extraordinarily difficult point to communicate."
Still, not all economists have sympathy for the Fed's way of looking at inflation. Long-time Fed watcher Alan Meltzer, of Carnegie Mellon'sTepper School of Business, said "inflation is and will continue to be a problem" and the only reason why the central bank is seeing such benign underlying price readings is due to statistical quirks related to the housing market. These are making inflation look more benign than it really is, Meltzer warns.
(Michael S. Derby, a special writer with Dow Jones Newswires, has covered the Federal Reserve since 2001. He also writes about bond markets and the economy, and can be reached at 212-416-2214 or via email: michael.derby@dowjones.com.)
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