WASHINGTON – Among the many things to be thankful for this holiday season is that you’re not Federal Reserve Chairman Ben Bernanke.

He’s besieged by turmoil in the credit markets, Wall Street clamoring for more interest-rate cuts and now inflation data that may tie his hands as he tries to keep an economic slowdown from snowballing into recession.

The Bureau of Labor Statistics reported Friday that consumer-price inflation jumped 0.8 percent in November, the largest increase since the aftermath of Hurricane Katrina. That bumped inflation felt in consumers’ wallets up 4.3 percent over the past 12 months.

Energy prices alone are up 21.4 percent over the past 12 months; food prices rose 4.8 percent over the same period. But when volatile energy and food prices are stripped out, core inflation rose by only 0.3 percent to a 2.3 percent annual rate; still, that’s above the Fed’s perceived comfort zone limit of 2 percent.

What’s so troubling about the core inflation numbers – which paralleled similar data released Thursday about wholesale inflation, as measured by the producer price index – is that rise above the Fed’s comfort zone.

It creates a dilemma. The economy is expected to slow early next year, and usually the Fed’s response would be to lower interest rates to spark economic activity. But that fuels inflation, the rise of prices across the economy. And if the Fed does so with inflation already rising, it risks inflaming inflationary expectations.

When people start expecting inflation to grow, employees demand higher wages and businesses hike prices. Inflation begins to feed on itself, which soon distorts investment choices, erodes the buying power of people on fixed incomes and disrupts economic decision-making everywhere.

“What you perceive is the Fed’s job is becoming very difficult moving into 2008,” said Kenneth Beauchemin, an economist with forecaster Global Insight in Lexington, Mass.

Wall Street economists roundly criticized the Bernanke Fed on Tuesday for not cutting interest rates more aggressively. Its quarter-point rate cut disappointed investors, who promptly dumped stocks and the Dow Jones average plunged almost 300 points.

But the Fed’s job isn’t to prop up stock prices. Rather, it’s to promote steady growth and stable prices. The new inflation data suggest that Wall Street was wrong and Bernanke was right.

The Fed’s preferred gauge of inflation is called the personal consumption expenditures price index. When energy and food are stripped out, this measure has come down in the past six months from an annualized peak of 2.4 percent to 1.9 percent in October, the last month for which there are data. That falls, barely, within the Fed’s comfort zone of 2 percent.

“The big picture is that the Fed is probably comfortable with where inflation is,” said Chris Varvares, the president of Macroeconomic Advisers in St. Louis, one of the nation’s most respected forecasters.

But the Fed remains vigilant, he said. He pointed to Tuesday’s Fed statement, which warned that “elevated energy and commodity prices, among other factors, may put upward pressure on inflation.”

That reference to “other factors” is code for the falling dollar, said Varvares, which is inflationary because it makes imports more expensive for U.S. consumers. “There is concern about pass-through from a falling dollar from non-energy import prices,” he said.

The Fed soon may face stagnant economic growth and rising inflation at the same time, a scenario called stagflation. It plagued the 1970s, but back then growth was slow while inflation ran in double digits. No one forecasts double-digit inflation.

“My feeling is this inflation problem has been much overblown,” said Lyle Gramley, a Fed governor from 1980 to 1985, when the Fed tamed runaway inflation. He isn’t worried about inflation gathering steam.

The job market isn’t so tight that it’s driving up wages, he noted, and rising energy prices aren’t being passed through the industrial supply chain as higher prices. Cautious spending by consumers also may dampen inflation, added Gramley, who’s now an economic adviser with the wealth-management firm Stanford Financial Group.


However, he said, the Fed has made its job harder by poorly communicating its views to financial markets.

“The question I get (asked) is “Does the Fed really get it … what’s wrong with those people?’ Things of that kind,” the veteran economist said. “The Fed’s behavior since August hasn’t been their finest hour. I think the Fed will do ultimately what it needs to do.”