U.S. inflation developments bear watching, but the impact of high energy costs on other prices has been limited and the economy will adjust over time, Federal Reserve Chairman Ben Bernanke declared on Thursday.

Bernanke told the Economic Club of Chicago the limited energy-price spillover reflected the central bank's success at keeping expectations of future inflation low and underscored the importance of safeguarding the Fed's credibility as an inflation fighter.

When inflation expectations are anchored ... the monetary policy response can be more limited, Bernanke said in answer to a question after delivering a speech on energy prices.

Bernanke, however, said a quickening in inflation outside the volatile food and energy areas, and a bit of a run-up in gauges of expected inflation, had caught his eye.

Although the rate of pass-through of higher energy and other commodity prices to core consumer price inflation appears to have remained relatively low in the current episode -- reflecting the inflation-fighting credibility built by the Fed in recent decades -- the cumulative increases ... have been large enough that they could account for some of the recent pickup in core inflation, he said in his speech.

Bernanke said while gauges of expected inflation had edged up in recent months, they remained within the ranges of recent years, with financial market measures having fallen back somewhat in the past month.

Nevertheless, these developments bear watching, he said.

The core U.S. consumer price index -- an inflation measure that strips out volatile food and energy costs -- has risen at a steep 3.8 percent annual rate in the past three months, the most severe burst in more than 10 years.

The pick-up in core inflation has come against a backdrop of rising inflation expectations, which some analysts have said raised questions about the Fed's anti-inflation credibility that have emerged since Bernanke took over the top post from long-time Fed chief Alan Greenspan on February 1.

But tough talk on prices from Bernanke have helped burnish the central bank's price-stability credentials. In addition, it has helped cement expectations of a 17th consecutive interest rate increase when Fed officials gather on June 28-29.


Bernanke pinned the big run-up in oil costs in recent years on high and growing demand and limited and uncertain supplies -- and he said there was little relief in sight.

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, he said.

Oil prices have held stubbornly near the April peak of $75.35 a barrel, the highest inflation-adjusted price since 1980, despite signs that energy-fueled inflation is forcing interest rates higher in a way that could curb demand.

Bernanke also warned that natural gas prices appeared destined to stay high. The days of persistently cheap oil and natural gas are likely behind us, Bernanke said.

But he said the United States would adapt by increasing its fuel efficiency, conservation and reliance on alternative energy sources.

In the long run, higher energy prices are likely to reduce somewhat the productive capacity of the U.S. economy, Bernanke said. Under the assumption that energy prices do not move sharply higher from their already high levels, these long-run effects, though clearly negative, appear to be manageable.