Federal regulators downplay the risks of inflation, but the private sector begins to worry about a weaker dollar and rising prices

Federal regulators are defending their monetary policies and maintain the risk of inflation is low, but investors are growing increasingly concerned over a weaker dollar and rising prices for energy and commodities.

“Despite further increases in commodity prices, measures of underlying inflation remained subdued and longer-run inflation expectations were stable,” concluded

members of the Federal Open Market Committee  at their meeting in late January. Ben Bernanke, chairman of the Federal Reserve, heads the committee.

The U.S. Consumer Price Index increased 0.4 percent for a second month, while the core CPI rate, which excludes food and energy costs, rose .2 percent, the biggest gain since October 2009. The dollar is falling against the yen this week and the latest unemployment figures show a rise in new applications for unemployment benefits. 

The financial data analyzed at the meeting reveal that the economic recovery is “firming” though the expansion is not yet sufficient to bring about a “significant improvement in labor market conditions,” according to the meeting minutes released Wednesday.

Bernanke has publicly downplayed rising fears of inflation, which are based in part on the federal “Quantitative Easing” program. Critics say that QE1 and QE2, which will pump up to $600 billion dollars into the economy through the purchase of federal debt, is too risky because it devalues the dollar and will eventually cripple the economy with inflation.

Concerned investors also point to such indicators as rising commodity prices, a January increase in new housing starts and inflation in emerging markets, as well as an extended stock market rally, as signs that growth of the global and U.S. economies is accelerating.  The Standard and Poor’s 500 index reached a 32-month high yesterday.

Bernanke maintains that the key purpose of QE2 is to stimulate a stagnant job market where unemployment currently stands at 9 percent. The economy will not heat up until that rate drops considerably, he said.

The consensus of the Open Market Committee is that measures of inflation remain low, with the core Consumer Price Index only slightly higher in December. They also point to continued weakness in the housing market despite low interest rates.

The staff also projects “subdued increases in core Private Consumption Expenditure prices and predicted only mild inflation in the next two years.

“As in previous projections, the persistent wide margin of economic slack in the forecast was expected to maintain downward pressure on inflation,” the minutes say, “but this influence was anticipated to be counterbalanced by the continued stability of inflation expectations and by increases in the price of imported goods.”

The staff added that upward pressure from increases in energy prices would wane by 2012, the minutes say. They also predicted a small pass-through from increased commodity prices to the broader Consumer Price Index.

Despite continued assurances by federal officials, inflation remains a key concern of affluent investors. Surveys conducted by Spectrem Group in December showed a high degree of concern over inflation, particularly among Mass Affluent investors, who have $100,000 to $1 million of net worth, not including their primary residence. Inflation, along with a prolonged economic downturn and the national debt, rank as the top three national concerns for these investors. Sixty-six percent said they were very concerned about rising prices. About 60 percent of investors with $1 million to $25 million in net worth said they are worried about inflation.

Copyright 2011 by MillionaireCorner.com