In part, the Fed's decision turns on a distinction economists make between inflation and "relative-price changes." The former is a general loss of purchasing power that's caused, or at least exacerbated by, overly lax monetary policy (such as keeping interest rates too low for too long). The latter are price hikes driven primarily by fundamental shifts in supply and demand.
If demand for commodities is spiking because of strong worldwide growth, the thinking goes, prices should rise accordingly, until consumers react by reducing consumption - a process that isn't apt to be influenced by interest rate changes.
The Fed is betting that rising prices won't feed through to higher general inflation expectations unless workers start demanding raises and companies start raising prices.
But wages haven't been rising sharply, and declining unionization means workers have less bargaining power than they did during the inflationary 1970s, economists say. And while some processors of commodities, like Dow, are charging more, their customers in turn have generally been unable to pass along those costs to consumers.
So even as some members of the Fed's policymaking body, such as Dallas Fed President Richard Fisher, warn of the need to take quick action against inflation - Fisher dissented for the third straight meeting in Wednesday's vote, this time advocating a rate increase - committee members' inflation forecast for 2010 has risen only slightly since October, despite surging oil prices.
