How Is Inflation Affecting the U.S. Economy?

Host Renee Montagne talks to David Wessel, deputy Washington bureau chief of The Wall Street Journal, about how the U.S. economy is reacting to inflation.

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RENEE MONTAGNE, host:

On Friday's, our business report focuses on your money. Today, what inflation is doing to the market.

It was only a couple of weeks ago that the U.S. economy seemed to be shrugging off the ill effects of higher oil prices. The stock market was soaring and the Federal Reserve was talking about a pause in its campaign to raise interest rates. Then the markets plunged, driven by concern about inflation, and while the markets have finished higher over the past couple of days, it's now unclear what the Fed will do next.

To find out what's going on, we turn to David Wessel, Deputy Washington Bureau Chief of the Wall Street Journal.

Good morning.

Mr. DAVID WESSEL (Deputy Washington Bureau Chief of the Wall Street Journal): Good morning.

MONTAGNE: What got the market so worried about inflation all of a sudden?

Mr. WESSEL: Well, the fears have been building some time as oil prices are up. But what happened was, in the middle of May, the government reported the consumer price index for April, and it showed a little more inflation than the markets had been expecting. And that seems to have really freaked them out.

MONTAGNE: If the Fed, though, worries about inflation so much, why were they even contemplating a sort of pause in upping interest rates?

Mr. WESSEL: Well, that's a good question. It's one that everybody's been asking, about the new Fed Chairman, Ben Bernanke.

Basically, the Fed has taken the short-term rates it controls from 1 percent in June 2004, up to 5 percent. So it's taken its foot off the gas pedal, but it hasn't touched the brake yet. So it was thinking, well, things were shaping up pretty well, there doesn't seem to be much inflation. The economy seems to be slowing. Maybe we can take a break.

But, what happened was that the energy price thing always poses a dilemma for the Fed, and that that dilemma is becoming clear now. Do higher oil prices hurt the economy, which means you can avoid putting your foot on the brake? Or do they mean more inflation, which means you should put your foot o the brake?

MONTAGNE: Well, you just mentioned the new Chairman, Ben Bernanke. What affect does it have that he's there now?

Mr. WESSEL: I think it has a pretty big effect. One is he still hasn't gotten his communications with the market down right, and that makes it a little harder for the market to gauge what his plans are. Did he mean 10/10 a pause, or did he mean 10/10 that they would stop interest rate raising? That seems to have confused the market.

But most importantly, I think, markets, when you have a new Fed Chairman, doubt that he has the stomach to fight inflation. And so what we see right now is some doubts in the market about whether he has the resolve to fight inflation, and they're a little more jittery about that then they were, say, a year ago, when Alan Greenspan was in charge.

My guess is that he will reassure them and it'll all work out well, but at the moment of uncertainty, you see this very volatile market.

MONTAGNE: Wall Street Journal Deputy Bureau Chief David Wessel. And thanks for joining us again this morning.

Mr. WESSEL: A pleasure.

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