Fed Reserve may target US inflation to control prices

The Federal Reserve, the US central bank, is considering publishing a formal inflation target as a way of keeping prices under control.

News of the internal discussions comes after an important consumer price index recorded a larger-than-expected increase last month, suggesting that higher food and energy prices may be feeding through into a more general rise in inflation.

Although price rises remain relatively modest, with the US economy running below capacity because of the ongoing effects of the credit crisis and recession, inflation hawks fear that the Fed's $2.35 trillion (£1.45trn) programme of quantitative easing could stoke further rises in the future.

An explicit inflation target was one of the ideas floated by Ben Bernanke when he became chairman of the Fed in 2007, but the plan is now believed to have moved beyond theoretical discussion.

Mr Bernanke has said one concern that could lead the Fed to start to tighten monetary policy would be if inflation expectations among the US population began to rise, which could lead to an upward spiral. A formal inflation target could help anchor expectations, and could counter the inflationary risks should the Fed decide it needs to stoke the US economy with new quantitative easing or by keeping interest rates at zero for longer.

Discussion is centering on a target of 2 per cent, which the markets already assume is the Fed's comfort level for core inflation.

Core inflation, which splits out volatile food and energy costs, rose by a higher than expected 0.3 per cent, month on month, in May, the fastest rate since July 2008. The rising costs of cars and clothing were among the factors pushing inflation higher. The annual inflation rate ticked up from 1.3 per cent in April, to 1.5 per cent. Adding in food and energy prices, annual inflation was 3.6 per cent in May.

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