By Joel Havemann in Washington
WHEN the Federal Reserve chairman, Ben Bernanke, testifies about the American economy to a US Senate committee overnight (Australian time), all eyes and ears will focus on his view of inflation and any hints of whether he will keep raising interest rates in order to curb it.
But some analysts think the Fed has less influence over inflation these days, making higher interest rates less effective as a tool to control it. They fear further rate increases could slow the economy and hurt consumers without reducing inflation.
Today's inflation, these economists believe, is driven substantially by rising prices of commodities and basic materials - oil, copper, aluminium, steel and others. Commodity inflation, they argue, is the result of forces largely beyond the control of US interest rates: political volatility in the Middle East, for example, and demand for materials from the rapidly growing economies of China and India.
"Most of our inflation is in commodities, and it is driven by global tensions and growth in foreign countries," said David Kelly, chief economist for Putnam Investments in Boston. "It's outside the reach of US monetary policy."
The Fed and Dr Bernanke will get fresh data on inflation on Wednesday morning (US time) when the Labor Department releases the consumer price index for June. In a preview of that data, it reported on Tuesday that producer prices - measuring prices at the wholesale level - rose an unexpectedly strong 0.5 per cent in June. That was propelled by a 1.4 per cent jump in food prices.
Excluding the volatile food and energy sectors, so-called core producer prices rose only 0.2 per cent, in line with economists' expectations.
Economists are watching the behaviour of the core price indices for signs that the recent run-up in oil and natural gas prices will spill into the costs of goods and services produced with large amounts of fuel.
So far there have been few such indications. Ian Shepherdson, chief US economist for High Frequency Economics, a New York consultancy, explained that the cost of goods accounts for only about one-quarter of the core consumer price index. For typical manufacturers, he said, commodities contribute about 10 per cent of costs, and so commodity price increases have a limited effect on the cost of goods apart from food and energy.
But for most Americans, food and energy are a large and growing share of their budget. And to the extent that their prices are set overseas, there is relatively little that the Fed can do to reverse the trend, some economists say.
"I don't think we should be using monetary policy to combat this," Mr Kelly said. He argued that lifting rates in response to higher commodity prices left workers with less in their pockets to pay for petrol and other products that depend heavily on raw materials.
Dean Baker, co-director of the Center for Economic and Policy Research, agreed. Tight money put downward pressure on wages, he said, making commodities harder to afford.
The Los Angeles Times