by Calculated Risk on 5/07/2008 12:14:00 AM

From Bloomberg: Fed's Hoenig Says `Serious' Inflation Risk May Prompt Rate Hike

``There is a significant risk that higher inflation will become embedded in the economy and require significant monetary policy tightening to reduce it,'' Hoenig said in the prepared text of a speech in Denver. Consumers are gaining an ``inflation psychology to an extent that I have not seen since the 1970s and early 1980s.''
...
``A sharp slowdown in growth has put the economy at the brink of a recession while, at the same time, rising commodity prices have caused inflation pressures to rise considerably,'' Hoenig said to the Economic Club of Colorado.
...
The combination of slowing growth and inflation is ``troublesome,'' Hoenig said. Rising global commodity prices and higher prices of imported goods from China and other markets are pushing up prices.

``Some would dismiss these rising inflationary pressures as temporary,'' he said. ``I believe they are more serious.''

Here is Hoenig's speech.

Update: here is a graph of the University of Michigan Inflation Expectations from the St Louis Fed.



Expectations are not well anchored, and inflation can become embedded in the system, even with rising unemployment. This is probably a huge concern for the Fed.