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Bernanke: Oil prices riddling economy
By ASSOCIATED PRESS
Published July 21, 2006
WASHINGTON - Surging energy prices are acting like a double whammy on the country's economy, crimping growth even as they push up inflation, Federal Reserve chairman Ben Bernanke said Thursday. "The increase in energy prices is clearly making the economy worse off both in terms of real activity and in terms of inflation. There is no question about it," Bernanke told the House Financial Services Committee. Although Fed policymakers at their June meeting were concerned about higher energy prices and the risk of inflation spreading through the economy, they also seemed hopeful that moderating economic activity could help ease inflation pressures down the road, according to minutes of that closed-door meeting released Thursday. Oil prices, which set record closing high of $77.03 a barrel last Friday, have retreated and are now hovering around $73 a barrel. If oil prices were to rise an additional $10 or $15 a barrel, there would be "significant consequences" for the economy, the Fed chairman added. The economy, which grew in the first quarter of this year at a 5.6 percent pace, the fastest in 2 years, is expected to slow to a pace of around 3 percent or less in the second half of the year, according to private economists' projections. Lofty energy prices, a cooling housing market and less consumer appetite for spending are figuring prominently in the forecast for slower overall economic activity. The rise in "core" inflation, which excludes energy and food prices, "seems to be a broad-based phenomenon, so we don't think it is a statistical illusion," Bernanke told the panel. For the first six months of this year, core prices rose at an annual rate of 3.2 percent - far outpacing the 2.2 percent rise for all of 2005. Even though Fed policymakers at the June 28-29 meeting expressed concern about higher readings on core inflation, they thought the phenomenon was more likely to be temporary rather than persistent, the minutes said. "Inflation was seen by most participants as likely to edge down," according to the minutes. To fend off inflation, the Fed has boosted interest rates 17 times since June 2004, with the most recent increase coming at the June meeting. The Fed's next meeting is Aug. 8, and hopes are rising among investors that the Fed might take a break in credit-tightening campaign then to assess economic activity. In other matters, Bernanke, at the House hearing: * Observed that the once high-flying housing market appears to be experiencing a safe landing. "The downturn in the housing market so far appears to be orderly," he said.* Expected U.S. workers' inflation-adjusted wages to rise in the coming quarters without necessarily causing an inflation problem. Last year, most workers' paychecks trailed inflation, putting a strain on some families budgets.
[Last modified July 20, 2006, 23:32:42]
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