Rising gas and food prices pushed up the cost of living in the United States last month. But with commodities now in retreat, Ben Bernanke's bet against long-term inflation pain is gaining traction.
The U.S. consumer price index, the most widely used measure of inflation, jumped to an annual rate of 3.2 per cent in April. But with oil and grain prices on the decline in recent days, inflation growth is now expected to stall - supporting the U.S. Federal Reserve Board chairman's plan to leave the rock-bottom interest rate untouched until 2012, or even 2013.
Indeed, without the jump in gas and food costs, price increases south of the border were modest last month. The core rate of the CPI rose just 0.2 per cent in the month, resulting in an annual core rate of 1.3 per cent.
Declining fuel and food prices play an especially important part in Mr. Bernanke's projections. If those prices do indeed cool down - or even just level off - in the next few months, the overall inflation figure should decline toward the core number, which is within the Fed's target range of about 1.75 to 2 per cent.
Paul Ashworth, chief U.S. economist at Capital Economics in Toronto, said food and fuel costs will likely continue to slip in the coming weeks, and that will "take some of the sting out of prices."
"These [CPI]numbers are from April, and the story has already moved on," Mr. Ashworth said.
Mr. Bernanke has said that increased food and fuel prices will not likely have long-term effects, because they won't last long. "That seems to have been the right call," said Mr. Ashworth, who predicts the U.S. inflation rate will peak at about 3.5 per cent this summer before dropping back.
Still, the shock of the recent jump in gasoline prices in the car-centric U.S. culture has prompted some fears that employees will demand higher pay, and this could contribute to a potential inflationary spiral if companies try to recoup those costs by jacking up prices.
That's an unlikely scenario, said BMO Nesbitt Burns senior economist Sal Guatieri. Unemployment is still high in the United States and job growth is so weak, employees and unions have little clout to ask for higher wages, he said.
Over the longer term, wage demands could become an issue in strengthening inflation, but only if commodity prices don't soften as expected. The worst-case scenario would see another leap in food and fuel prices, a resulting buckling of the U.S. economy as consumers pull in their horns, and perhaps a slip back into recession.
Mr. Guatieri said his concerns about the U.S. economy will ease as long as "we see commodity prices continuing to fall a little bit, or at least level out in the next year."