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UPDATE 3-Ex-Fed chief Volcker sees 70's-style inflation risks

Thu May 15, 2008 12:08am IST
 
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(Adds background, quotes from Bush administration, Sen. Charles Schumer)

By Joanne Morrison

WASHINGTON, May 14 (Reuters) - Former U.S. Federal Reserve Chairman Paul Volcker warned on Wednesday the United States could face a 1970s-style period of skyrocketing inflation if investors lose confidence in the buying power of the U.S. dollar.

"If there is a real loss of confidence in the dollar, then I think we are in trouble. That is something that has to be watched," Volcker told the congressional Joint Economic Committee.

The former Fed chief who championed the battle against double-digit inflation in the 1970s by raising interest rates sharply, warned that without careful focus on the declining dollar and inflation, the U.S. could face similar, or even worse, inflation pressures.

"That has to be very much in the forefront of our thinking, without that, we are back to the inflation of the 1970s or worse," Volcker said, questioning the relevance of measuring inflation by stripping away volatile food and energy prices.

His comments came after oil's recent rise to record highs, which has boosted gasoline prices sharply for consumers already dealing with a slowing economy.

On Wednesday, the government reported that inflation only grew by a moderate 0.2 percent during April and an even more tame 0.1 percent when excluding volatile food and energy prices. Volcker raised some doubts about the way the government measured inflation.

"It doesn't feel quite right," Volcker said of considering the so-called core rate, particularly as food and energy prices have been rising for years.  Continued...

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