Financial Update - Volume 19, Number 3 - Fed Chair Speaks on Energy Costs’ Effects
Vol. 19, No. 3,
Third Quarter 2006
Fed Chair Speaks on
Global demand, constrained production push prices
Energy prices are responding to the common economic forces of supply and demand, Bernanke said in his speech to the Economic Club of Chicago. Growing economies around the world are demanding more oil, and supply has been pinched by available capacity, hurricanes, and geopolitical instability. "The days of persistently cheap oil and natural gas are likely behind us," he said.
Down the road, Bernanke said, it's safe to assume that global demand for oil and other forms of energy will continue to grow. This growing demand, coupled with higher prices and concerns about supply security, will spur improvements in energy efficiency, he said, citing Japan as an advanced industrial nation that uses about half as much energy as the United States does to produce a dollar's worth of economic output.
Keeping inflation expectations at bay
Although increased energy costs have placed some upward pressure on core inflation, which excludes food and energy, Bernanke said the economy has largely been able to absorb the impact as economic growth continues. But he said that the effect of higher energy costs, and the potential for those costs' passing through to other items, could foster inflation expectations. "As yet, these expectations measures have remained within the ranges in which they have fluctuated in recent years," he said. "Nevertheless, these developments bear watching."
In the long run, the Fed's stated intention to keep inflation from seeping into the economy will counter such expectations, Bernanke said, and he believes that market forces will act as a corrective.
"The market for alternative fuels is growing rapidly and will help to shift consumption away from petroleum-based fuels," he said. "Government can contribute to these conservation efforts by working to create a regulatory environment that encourages the growth in energy supplies in a manner that is consistent with our nation's environmental and other objectives. Given the extraordinary resilience of the U.S. economy, I am confident our nation will be up to this challenge."