For a self-proclaimed advocate of inflation-targeting, Federal Reserve Chairman Ben Bernanke seemed remarkably unperturbed this week by recent signs that price increases in the economy are accelerating.
In congressional testimony, the rookie chairman made clear that he expected slowing economic growth to bring inflation back into a more acceptable range, despite recent evidence that soaring energy prices are filtering down to other sectors.
Some analysts were surprised to see him take such a laissez-faire approach toward inflation, particularly since the Fed's own forecasts for underlying price trends were revised higher in its most recent outlook.
The most salient shift in Bernanke's inflation rhetoric was a seeming willingness to overlook inflation beyond a threshold previously believed to be more or less set in stone.
In an about face, the testimony and Q&A appeared to downplay the importance of the 1-2 percent comfort zone, said David Hensley, director of global economic research at JP Morgan. The Federal Open Market Committee forecasts that core inflation will exceed 2 percent this year and next, and Bernanke seemed comfortable with this prospect.
Interestingly, investors seemed to be giving Bernanke the benefit of the doubt, despite concerns at the outset of his tenure as chairman regarding his inflation-fighting credentials.
Both the stock and bond markets rallied following his testimony, interpreting his emphasis on the softening growth picture as a thinly veiled hint that the central bank is just about ready to take its foot off the monetary brakes.
Still, Wall Street is hardly famous for its patience. The leeway investors have given Bernanke would certainly wane if inflation continues to pick up despite a deceleration in the economy
Already, doubts are creeping into the market's mind-set.
We have some concern that the Fed chairman has turned soft on inflation at the wrong time, said David Greenlaw, chief U.S. fixed-income economist at Morgan Stanley, adding that price pressures could intensify.
Investors often like to say that the trend is your friend in financial markets, but that would hardly apply to the recent pattern of inflation.
Consumer prices excluding food and energy, considered the best measure of the broader inflation trajectory in the economy, have jumped 0.3 percent for four straight months, bringing core CPI in the year to June up to 2.6 percent.
Another barometer favored by the Fed, the core personal consumption expenditures index, is proving slightly more subdued, but has also shown signs of racing higher.
Analysts point out that even an inflation-targeting regime would not be so rigid as to never allow fluctuations outside the central bank's stated aim. Rather, an explicit inflation goal is an effort to set a long-term anchor that helps keep price expectations in check.
Nonetheless, the prospect of a Fed that is reticent to step in to curb inflation is something that makes investors more than a bit queasy.
Bernanke wants to create some wiggle room because he sees that the economy has slowed and is likely to slow more, said Ken Mayland, president of ClearView Economics, a forecasting firm in Pepper Pike, Ohio.
But if you're creating wiggle room, well, then you're not inflation targeting. And that brings up a problem, because if you've set up inflation targeting as a principle, you're compromising your principle.
Unlike the Fed chief, Mayland said he was counting on inflation to continue its recent ascent, if only because some low readings from more than 12 months ago are due to drop out of the year-over-year comparisons.
I'll bet dollars to donuts that we get an acceleration, he quipped.
(additional reporting by Steven C. Johnson)