Bernanke Says Fed Won't Take Eye Off Inflation

Fed chief watching energy costs, and consumer and business mindset.

WASHINGTON (AP) - Energy prices are likely to stay high, and how much they push up the prices of other goods and services bears close watching, Federal Reserve Chairman Ben Bernanke said 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,'' Bernanke 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 mind-set 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 prophesy.

Some measures of such ''inflation expectations'' have ''edged up, on net, in recent months,'' Bernanke noted.

''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 made his comments in prepared 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 world global demand and tight supplies.

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

Oil prices, which hit a record high of $75.17 a barrel in late April, are now hovering above $69 a barrel. Gasoline prices have topped $3 a gallon in many areas.

Those high energy prices are making inflation worse.

For the first five months of this year, consumer prices were galloping ahead at an annual rate of 5.2 percent _ outpacing the 3.4 percent rise for all of 2005.

Core prices, which exclude food and energy, are advancing at a 3.1 percent pace so far this year. That compares with a 2.2 percent increase in 2005 and suggests the price tags of lots of other goods and services are going up. Some of the increases in core prices reflect the spillover of high energy prices, economists say.

The high cost of energy can affect the economy in a number of ways, Bernanke said. It can make inflation worse. Or it can slow economic growth, he said.

Thus far, economic activity seems to be holding up fairly well to lofty energy prices, he suggested.

''The U.S. economy is remarkably flexible and it seems to have absorbed the cost shocks of the past few years with only a few dislocations,'' he 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, June 28-29.

At that time, economists predict the Fed will boost its key rate to 5.25 percent, which would mark the 17th quarter-point increase since June 2004.

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