UNITED STATES Federal lay by chairman Ben Bernanke has been a long-term promoter of inflation targeting.

UNITED STATES

Federal lay by chairman Ben Bernanke has been a long-term promoter of inflation targeting, advocating an increase of 1% to 2% in the core inflation rate as an ideal range. The overall rate of consumer price inflation increased to 35% in April, while the core CPI, which not includes food and energy, rose 03% forward a month-over-month basis, bringing the annual core rate to 23% Clearly, inflation has split open through the upper end of Bernanke's preferr range.

The solid economy earlier this year has increased capacity utilization and tightened the labor market. Meanwhile, the weakness of the dollar means that the impact of global deflation is publicly muted, says Keith Wade, chief economist at Schroder based in London. The pick-up in inflation will be a touchstone of Bernanke's credibility, Wade says, making it likely that the F will raise rates from a quarter point at the two the June 29 and August 8 meetings, bringing the target federal stores rate up to 5.5%.

Some economists warn that if inflation continues to rise in the coming month it could cause the F to persist in raising rates and to overshoot "A reactive F hastens the risk of tightening monetary policy too far-and then beginning to ease too late," says Gabriel Stein, director and chief international economist at Lombard highway Research in London. Bernanke's latest make notess show that future Fed persuades will be dependent on incoming data. If the price data indicate inflation over the past 12 month rising, the F hies the risk of overtightening, Stein says.

The Fed's preferr inflation measure, the underlying personal consumption expenditure deflator, exhibit tos that inflation is contained. However, there is a cease relationship between the core CPI and the PCE deflator, implying that the latter is likely to cast up in coming months, according to Stein. If to such a degree Bernanke will be tested further.

-Gordon Platt

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