Energy prices are likely to remain high and their effect on broader inflation bears close watching, U.S. Federal Reserve Chairman Ben Bernanke said today.

He reiterated his warning that the central bank will be vigilant against inflation.

“Unlike in earlier episodes, the significantly higher relative price of energy that we are now experiencing is expected to be relatively long lasting and thus will likely prompt more-significant adjustments by households and businesses over time,” Bernanke said prepared remarks to the Economic Club of Chicago.

Bernanke said keeping inflation expectations contained is key in preventing spill over effects of higher energy prices.

“To the extent that households and business owners expect that the Fed will keep inflation low, firms have both less incentive and less ability to pass on increased energy costs in the form of higher prices,” he said.

“And likewise, workers have less incentive to demand compensating increases in their nominal wages,” Bernanke said.

The Fed chie noted that survey-based inflation expectations and market-based gauges such as nominal and inflation-indexed government-bond yields “have edged up, on net, in recent months.”

“As yet, these expectations measures have remained within the ranges in which they have fluctuated in recent years and inflation compensation implied by yields on government debt has fallen back somewhat in the past month,” Bernanke said.

“Nevertheless, these developments bear watching,” he added.


Besides the inflationary effect of higher oil and other energy prices, Bernanke also noted that the long-run economic effects, “though clearly negative, appear to be manageable.”

“The U.S. economy is remarkably flexible, and it seems to have absorbed the cost shocks of the past few years with only a few dislocations,” he said.

However, he did note that higher energy prices “are likely to reduce somewhat the productive capacity of the U.S. economy” over the long run, and may restrain productivity growth by causing businesses to trim new investment.