[NEW YORK (Fortune) -- Even Warren Buffett is wrong some of the time. Federal Reserve chairman Ben Bernanke is hoping this is one of them.
Buffett, the billionaire investor behind Berkshire Hathaway (BRKA, Fortune 500), fingered "exploding" inflation Wednesday as the biggest risk to the economy. "I think inflation is really picking up," Buffett said on CNBC. "It's huge right now, whether it's steel or oil," he continued. "We see it everywhere."
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.
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.
To be sure, there are other factors at work in the Fed's move to the sidelines. Bernanke & Co. wants to measure the stimulative effect of the rate cuts it's already made. The rate cuts of the past nine months - the Fed has slashed its overnight bank lending rate by 3.25 percentage points since September - will take time to impact the economy. If possible, the Fed wants to wait before making another move on rates.
And while fears of a marketwide meltdown seem to have eased, a weak housing market, rising unemployment and increasing loan losses at banks mean the risk of a sharp economic pullback remains substantial.]
Just pulled out the pearls.. . . .
