Inflation Concerns Continue

[Aug 2, 2007.]

It appears that members of the Federal Reserve Board continue to be concerned about the specter of inflation.

Last month, the Fed chose to hold interest rates steady—even though the current housing crisis could jeopardize economic growth. Minutes from a Fed meeting in late June indicate that Fed officials have a "predominate concern" that inflation will not be turned back.

While it does appear that the situation regarding inflation may be improving, Fed officials said this was "not seen as convincing evidence that the recent moderation of core inflation would be sustained."

The core inflation rate does not include two key, yet ever-changing items—energy and food prices.

The minutes from the Fed meeting further stated, "Participants were wary of drawing any firm conclusions about future trends from a few monthly readings that could reflect transitory influences and remained concerned about forces that could contribute to inflation pressures."

The overall inflation rate has been on an upward trajectory because of increases in food and energy prices. Members of the Fed have been questioning whether such a trend is likely to affect the buying and business habits of CEOs, investors, and other Americans. In fact, consumer behavior could trigger a rapid rise in the inflation rate. As a result, Fed officials say there is a possibility of worsening inflation fears.

The release of the Fed minutes, however, did not have an immediate impact on stocks, with the Dow Jones Industrials rising to a record 14,000.41. In fact, the strong finish on Wall Street may be an indication that the economic picture is brightening.

The interest rate has remained at 5.25%—a familiar figure by now. The rate has been unchanged for a little more than a year. There are indications the rate may stay the same for the remainder of 2007.

Julie Ann Amos
August 2nd 2007

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