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Updated Thursday, March 3, 2011 9:04 pm TWN, AP

U.S. Federal Reserve Chairman Ben Bernanke gives the Semiannual Monetary Policy Report to Congress while testifying before the Senate Banking Committee on Capitol Hill in ...

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Bernanke seeks to ease inflation fears

WASHINGTON -- U.S. Federal Reserve Chairman Ben Bernanke boldly predicted to Congress on Tuesday that rising oil prices will cause only a brief and modest rise in consumer inflation.

If he is wrong, as some lawmakers suggested to him, the risks are high: a weaker economy and elevated consumer inflation.

Bernanke's credibility is at stake, too. His duties as Fed chief require a balancing act: Leading America's economy to stronger growth while making sure inflation doesn't rise too high.

Appearing before the Senate Banking Committee, Bernanke faced sharp questions about whether rising gasoline prices could spread dangerous inflation through the economy. He said he did not think so.

“The most likely outcome is that the recent rise in commodity prices will lead to, at most, a temporary and relatively modest increase in U.S. consumer price inflation,” Bernanke said.

Still, persistently higher prices could shake consumer confidence, prompting consumers to reduce spending. And that would weaken the economy, he acknowledged.

Gas prices jumped over the weekend to a new nationwide average of US$3.37 a gallon. That's 26.7 cents a gallon more than a month ago. Food prices in January rose at the fastest since the fall of 2008.

U.S. Senator Patrick Toomey called the rise in commodity prices “stunning.” Toomey said he worries about the effects of those higher prices, combined with the Fed's efforts to boost the economy through a Treasury bond-purchase program. Toomey said they might be “planting the seeds of serious inflation down the road.”

Bernanke defended the Fed's US$600 billion Treasury bond-buying program. He said it is still needed to energize the economy and reduce unemployment, now at 9 percent. The bond-buying program is intended to lower rates on loans and lift stock prices, spurring more spending and invigorating the economy. The purchases are scheduled to end in June.

Republicans in Congress and some Fed officials say they fear the bond purchases could trigger high inflation and a wave of speculative buying on Wall Street that could lead to new bubbles in the prices of assets like stocks and bonds.

“Once price stability has been lost, it is difficult and very costly to regain,” warned Sen. Richard Shelby, the panel's top-ranking Republican.

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