Bernanke said today during his semi-annual monetary policy testimony before the Senate Banking Committee in Washington that the surge in oil and commodity prices in general probably won’t cause a permanent increase in overall inflation and reiterated that borrowing costs are likely to stay low for an extended period of time. He also admitted that the Federal accumulation of massive quantities of debt would soon harm the economy, but that now isn’t the time to reduce government spending. In fact, in response to a question from Sen. Reid regarding the dangers of reducing deficit spending this year, Bernanke warned that scaling back government spending would hurt GDP growth.
Regarding inflation, the Chairman also said that stable labor costs would lead to, “a temporary and relatively modest increase in U.S. consumer price inflation,” Ok Ben, now let’s look at reality. The ISM February manufacturing survey released today showed that the prices paid component has now reached 82. This is what survey respondents have to say about the current inflation situation:
"A continued weak dollar is increasing the cost of components purchased overseas. It is going to force us to increase our selling prices to our customers." (Transportation Equipment)
"We continue to see significant inflation across nearly every type of chemical raw material we purchase." (Chemical Products)
"Prices continue to rise, while business limps along at last year's pace." (Nonmetallic Mineral Products)
"Overall demand is off 10 percent." (Plastics & Rubber Products)
So who should you listen to, Bernanke or Markets? Bernanke says we have “low and stable inflation”, but the dollar is falling, commodity prices are surging and manufactures and food producers are screaming for help. I don’t know about you but I bestow the same respect and value to what the Fed has to say as I do belly button lint.