Regional Fed President Comments on Commodity Prices and Impact on Economy

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Janet Yellen reported that recent increases in commodity prices are due to temporary disruptions in supply and increasing demand as economies recover from recession. She noted that increases in gasoline prices have important impacts on the economy because they act as a tax on consumption that goes to foreign suppliers. Fed studies show that a $1/gallon increase in gasoline prices, similar to what we have observed this year, have the effect of a 1% decline in disposable income. A 1% fall in disposable income will lead to a comparable decline in consumption. This will also affect the outlook for businesses that depend on household consumption, and discourage business investment. The result is a slowdown in recovery and job growth.

She views the disruption in supply as a temporary problem however, and she does not believe that it will have a long term impact on growth or on the inflation outlook. Consequently, she sees no reason for the Fed to alter current monetary policies. Of course, she also stated the Fed will continue to be vigilant and that it will be alert to anything that might affect the inflation outlook.