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US Fed keeping a close eye on inflationary pressure

Energy prices are likely to stay high and officials must keep a close eye on how much they push up the costs of other goods and services, US Federal Reserve Chairman Ben Bernanke said on Thursday.

He warned anew that the central bank will be vigilant against inflation.

"The cumulative increases in energy and commodity prices have been large enough that they could account for some of the recent pickup in core inflation," he said.

When measuring core inflation, volatile energy and food prices are removed so that economists can get a better picture of how other prices are acting.

Just as important as inflation numbers is the inflation mindset of investors, businesses and consumers, Bernanke suggested. The fear: If people and companies think inflation will get worse a year from now, they can change their behavior in ways that make it a self-fulfilling prophecy.

Some measures of such "inflation expectations" have "edged up, on net, in recent months," he said.

"As yet, these expectations measures have remained within the ranges in which they have fluctuated in recent years and inflation compensation implied by yields on government debt has fallen back somewhat in the past month," he said. "Nevertheless, these developments bear watching."

Bernanke offered his latest observations in remarks to the Economic Club of Chicago. A copy of his speech was distributed in Washington.

The Fed chief said that in the short run, energy prices are likely to stay high given strong global demand and tight supplies.

"The days of persistently cheap oil and natural gas are likely behind us," Bernanke said.

It's the second time in just over a week that Bernanke has talked about inflation, although Thursday's speech was in the broader context of the energy climate.

In a June 5 anti-inflation speech that sent stocks plunging around the world, Bernanke said the Fed would take all necessary action to make sure inflation doesn't spread through the economy.

Investors and economists took that as a strong signal that interest rates will move higher at the Fed's next meeting on June 28-29.

Economists predict the Fed will boost its key rate to 5.25 percent, which would mark the 17th quarter-point rise since June 2004.
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