Inflation has seen an upward spike in the first half of 2006 as a result of the increase in crude oil prices which has resulted in an upward price spiral on a diverse range of goods and services. Even after this spike, inflation did remain within expected parameters. It seems the American economy is undergoing a transition which is visible in the delayed effect of monetary policy. During the end of the year growth in service, industries remained strong with the weakest growth in the automobile and housing sector yet housing demand continued to be considered strong in a limited number of markets.
Wages managed to grow moderately with some regional exceptions. The rise in long-term interest rates contributed to an increase in borrowing costs. Inflation has been higher than expected with the increase reflecting on the prices of a range of non-energy goods and services. In addition, an increase in housing rents has contributed to higher inflation. This rise in inflation is of more concern to the Federal Reserve than any recession fears because the achievement of price stability is one of the core objectives of Congress's mandate to the Federal Reserve.
More important price stability is integral to achieving maximum employment and moderate interest rates (long term) which are also an integral part of the mandate. Inflation is expected to slow down over time as the price of major commodities stabilizes. Monetary policymakers operate work in an uncertain environment with imperfect knowledge of the effect of policy actions as well as of many other factors that help shape economic progress during the forecasted period. It is these uncertainties that have a strong effect on policy decisions because their economic influence becomes prominent after a substantial period of time has passed.
It is this lag between policy actions and their effects that the Federal Reserve analyzes and basis its policies upon. As Chairman Ben S. Bernanke said in his testimony to Congress (July 19th, 2006)
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