Federal Reserve Chairman Ben Bernanke said Wednesday he does not believe the United States will experience the out-of-control prices seen with 1970s oil shocks.
His assessment came in a speech delivered Wednesday to graduating students at Harvard University, where he earned a bachelor's degree in economics in 1975.
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Back then, the economy suffered from a dangerous combination of stubborn inflation and stagnant growth. There are fears today that the U.S. may be heading in that direction again.
“We see little indication today of the beginnings of a 1970s-style wage-price spiral, in which wages and prices chased each other ever upward,” Bernanke said at Harvard.
Then, as now, the U.S. endured a serious oil price shock, sharply rising prices for food and other commodities and subpar economic growth, he said.
Today's economy, however, is more flexible in responding to difficulties and the country is more energy efficient than a generation ago, Bernanke said.
“Since 1975, the energy required to produce a given amount of output in the United States has fallen by half,” he said.
Over the years, Fed policymakers also have learned more about inflation and how to fight it, he said.
Bernanke's remarks come just one day after he said that the Fed's rate-cutting campaign was coming to an end because of increasing concerns about inflation. He took aim at the role of the weakened dollar in pushing prices higher.
The Fed is paying attention to the extent to which consumers, investors and businesses believe prices will rise in the future. Monitoring those “inflation expectations” are important. If people believe inflation will keep going up, they will change their behavior in ways that aggravate inflation – thus, a self-fulfilling prophecy.
“Some indicators of longer-term inflation expectations have risen in recent months, which is a significant concern for the Federal Reserve,” Bernanke told the Harvard students.
The inflation rate has averaged about 3.5 percent over the past four quarters. That is “significantly higher” than the Fed would like but much less than the double-digit inflation rates of the mid-1970s and 1980, Bernanke said.