"Although monetary policy has greater latitude, the credibility of the Fed's commitment to low inflation may be eroding given the persistent increases in fuel and food prices, the most visible and frequent household purchases," the Surveys of Consumers said in a report released on Friday.
NEW YORK (Reuters) - Firm inflation poses a challenge to the Federal Reserve's credibility but is unlikely to signal a return to 1970s-style price growth, according to the Reuters/University of Michigan Surveys of Consumers.
"Although monetary policy has greater latitude, the credibility of the Fed's commitment to low inflation may be eroding given the persistent increases in fuel and food prices, the most visible and frequent household purchases," the Surveys of Consumers said in a report released on Friday.
The report said that heightened inflation expectations appear to have taken hold in lower-income households.
His conclusions were based on polling conducted over the first quarter of 2008, when the Surveys of Consumers talked to approximately 500 households per month.
!ADVERTISEMENT!Households in the bottom third of the income distribution expected a higher inflation rate during the year ahead than households in the top third, the report says.
But there was no difference in long-term inflation expectations across income groups, "indicating that there was no trace of the initial buildup of inflationary psychology that was in evidence in the prior era."
One key difference between the most recent episode of higher inflation has been the breakdown of goods affected.
In previous periods of robust inflation "nearly all goods and services increased at an accelerating pace" but more recently there has been a decade-long decline in prices of items such as household durables, appliances, home electronics, vehicles and clothing, the report said.
"In contrast, the recent increases in inflation have been entirely driven by food and fuel prices, as well as by increases in medical care and other services," it added.
This could have implications for monetary and economic policy, especially since it has affected lower-income households.
"While consumers benefited from low prices on a wide range of commodities, the wages of less skilled workers have stagnated," the report said.
(Reporting by Burton Frierson; Editing by James Dalgleish)
