A spike in energy prices in the aftermath of Hurricane Harvey boosted the U.S. cost of living by the most since January, while inflation excluding food and fuel was below estimates, a Labor Department report showed Friday.
While economists expected an overall pickup in price gains in the aftermath of Hurricanes Harvey — energy costs rose by the most since June 2009 — the details suggest any broader acceleration in U.S. inflation may need more time to gain traction.
PG View: Should take at least a little wind out of December rate hike expectation sails.
The Federal Reserve’s own actions, not transitory factors, are responsible for weak inflation, a Fed policymaker argued on Monday, and the U.S. central bank should wait to raise rates again until inflation hits its 2-percent goal.
“The FOMC’s policy to remove monetary accommodation over the past few years is likely an important factor driving inflation expectations lower,” Minneapolis Fed President Neel Kashkari wrote in an essay on the bank’s website, referring to the central bank’s Federal Open Market Committee, which sets U.S. interest rates. “My preference would be not to raise rates again until we actually hit 2 percent core PCE inflation on a 12-month basis, unless we have seen a large drop in the headline unemployment rate signaling that we have used up remaining labor market slack, or a surprise increase in inflation expectations.”
PG View: Tighter policy is not the path to higher inflation. But easier policy has failed to boost inflation for years as well. So, what’s a central bank to do?
Eurozone inflation rose at an annual rate of 1.5 per cent cent in September, missing economists’ forecasts and leaving the ECB with a dilemma as it weighs whether the economy is strong enough for it to roll back its bond-buying programme.
PG View: I’m sure, here too this is transitory. But keep in mind, weak inflation has been “transitory” for nearly two-decades in Japan, despite massive monetary accommodations.
“The Fed is basing its moves on classic cyclical indicators and the desire to ‘normalize’ the balance sheet,” Bridgewater Associates told clients in a private note, which was seen by Business Insider. “Based on the calculations that we do, we doubt that the Fed will be able to execute its plan without causing problems.”
Reason 1 (of 5): “There is not nearly enough inflation and overheating risk to make concerns about inflation and overheating of paramount importance.”
Mauldin Economics/John Mauldin/09-27-17
When is a mystery not a mystery? When Janet Yellen is puzzling over a lack of inflation, that’s when. So say Brian Wesbury, chief economist, and Robert Stein, deputy chief economist of First Trust, in today’s Outside the Box. The bottom line: QE didn’t work, and Janet knew it was unlikely to work, from the start.
…So forgive us for asking, but after unprecedented expansion of banking reserves and the Fed balance sheet, with little inflation, is it really a “mystery?” Or, is it proof of what we believed all along: QE didn’t work?
…instead of boosting Milton Friedman’s key money number (M2), the excess monetary base growth went into “excess reserves” – money the banks hold as deposits, but don’t lend out. Money in the warehouse (or in this case, credits on a computer) doesn’t boost demand! This is why real GDP and inflation (nominal GDP) never accelerated in line with monetary base growth.
The Federal Reserve may have overstated the strength of the labor market and the rate of inflation, leading to monetary policy ahead that will be easier than previously thought, Fed Chair Janet Yellen said Tuesday.
…The result would be an even more dovish Fed when it comes to removing the historically aggressive policy accommodation in place since the financial crisis.
“My colleagues and I may have misjudged the strength of the labor market, the degree to which longer-run inflation expectations are consistent with our inflation objective, or even the fundamental forces driving inflation,” Yellen said, according to prepared remarks.
PG View: While the market seems to have latched on to the reiteration that gradual rate hikes are appropriate, the acknowledgement that the Fed might be wrong seems pretty dovish in actuality.
“…if longer-run inflation expectations are running at levels consistent with longer-run PCE price inflation somewhat below 2 percent, the FOMC can still achieve its inflation goal. Under those conditions, continuing to revise our assessments in response to incoming data would naturally result in a policy path that is somewhat easier than that now anticipated–an appropriate course correction that would reflect our commitment to maximum employment and price stability. — Janet Yellen
Reuters/ Jonathan Spicer & Stephanie Kelly/09-05-17
U.S. inflation is falling “well short” of target so the Federal Reserve should be cautious about raising interest rates any further until it is confident that prices are headed higher, an influential Fed policymaker said on Tuesday.
In a dovish speech in the face of months of weak inflation readings, Fed Governor Lael Brainard said the U.S. central bank should go so far as to make it clear it is comfortable pushing prices modestly above the Fed’s 2-percent target.
“We should be cautious about tightening policy further until we are confident inflation is on track to achieve our target,” Brainard, a permanent voter on monetary policy, said in a speech in New York.
Bloomberg/Jeanna Smialek & Carolynn Look/08-21-17
As the world’s top central bankers gather in Wyoming this week, their relief about a stronger global economy will be tempered by a growing unease that inflation remains inexplicably low.
The most important market news of the day.
Federal Reserve Chair Janet Yellen and European Central Bank President Mario Draghi will be among the officials addressing this year’s installment of the annual conference hosted by the Kansas City Fed. The summit, held at a Jackson Hole mountain retreat, comes as central banks in advanced economies creep toward the policy exit after years of unprecedented easing, even with outlooks are clouded by stubbornly tepid inflation.
Prices have been slow to pick up despite solid growth and falling unemployment, suggesting that the long-observed relationship between inflation and labor-market slack might have frayed. That puzzle will likely surface as the conference debates this year’s theme of “Fostering a Dynamic Global Economy” against the backdrop of the Grand Teton mountains.
“Inflation has been the big question mark, both here and abroad,” said Michelle Meyer, head of U.S. economics at Bank of America Corp. in New York.
U.S. producer prices unexpectedly fell in July, recording their biggest drop in nearly a year and pointing to a further moderation in inflation that could delay a Federal Reserve interest rate increase.
…Though the link between the PPI and the consumer price index has weakened, last month’s drop in producer prices could worry Fed officials who have long argued that the moderation in inflation was temporary.
Fed Chair Janet Yellen told lawmakers last month that “some special factors” were partly responsible for the low inflation readings. Inflation, which has remained below the U.S. central bank’s 2 percent target for five years, is being watched for clues on the timing of the next Fed interest rate increase.
Inflation in the Group of 20 largest economies, which account for most of the world’s economic activity, fell to its lowest level in almost eight years during June, deepening a puzzle that confronts central banks as they contemplate the removal of post-crisis stimulus policies.
The Organization for Economic Cooperation and Development Thursday said consumer prices across the G-20 were 2% higher than a year earlier. The last time inflation was lower was in October 2009, when it stood at 1.7% as the global economy was starting to emerge from the sharp downturn that followed the global financial crisis.
The contrast between then and now highlights the mystery facing central bankers in developed economies as they attempt to raise inflation to their targets, which they have persistently undershot over recent years.
According to central bankers, inflation is generated by the gap between the demand for goods and services and the economy’s ability to supply them. As the economy grows and demand strengthens, that output gap should narrow and prices should rise.
PG View: The good jobs report changes nothing . . .
The U.S. dollar fell on Wednesday, erasing an earlier gain after the Federal Reserve was seen as striking a somewhat cautious note on inflation, which is seen as bearish for greenback.
The U.S. central bank said inflation was “running below 2%” instead of “running somewhat below 2%,” as it had in its June statement. The Fed’s preferred inflation gauge, the personal-consumption index, or PCE index, has tapered off to 1.4% growth over 12 months from a five-year high of 2.1%.
The Fed also indicated, as expected, that it would start to wind down its bondholdings “relatively soon” and kept interest rates unchanged, as had been widely expected.
PG View: The dollar index tumbled to fresh 13-month lows after the Fed’s announcement, providing on ongoing tailwind for gold.
That notion is a bit of a head-scratcher. Most people don’t like inflation. They would prefer that a dollar tomorrow be worth the same as a dollar today.
But a recent drop in inflation may be a sign of fresh economic weakness and is perplexing to Federal Reserve officials who are now wrapping up the central bank’s stimulus campaign.
The Federal Reserve thinks modest inflation has important economic benefits, and it has aimed since 2012 to keep prices rising at an annual pace of 2 percent. The problem is that the Fed is on track to fail for the sixth straight year. Inflation has been stubbornly sluggish.
A little inflation can brighten the economic mood, causing wages and corporate profits to rise more quickly. Economists like to point out that this is an illusion. If everyone is making more money, then no one can buy more stuff. Prices just go up. But the evidence suggests people enjoy the illusion and, importantly, they respond to the illusion by behaving in ways that increase actual economic growth, for example by working harder.
The US CPI report for June, published on Friday, was the fourth successive monthly print that surprised on the low side. Initially, these inflation misses were dismissed by the Federal Reserve as idiosyncratic and temporary, but they are now becoming too persistent to ignore. If they are not reversed fairly soon, the FOMC will need to give greater weight to the possibility that inflation may not return to target over the next couple of years.
…The FOMC tends to emphasise the behaviour of core PCE inflation when assessing the outlook for the underlying trend in inflation. Here, too, the evidence suggests that the Fed’s 2 per cent inflation target is increasingly in jeopardy.
Federal Reserve plans for gradual interest-rate increases hinge on inflation rising to its 2 percent target, but it’s not showing up and they don’t know why. That’s undermining Chair Janet Yellen’s case for further policy tightening.
Over two days of congressional testimony this week, Yellen stuck to the Fed’s outlook for gradually rising inflation that would support additional hikes in their policy rate. That was before Friday’s consumer price index report that showed continued weak pricing power in June across a range of goods and services for the fourth consecutive month.
“There is no way of getting around it,” said Laura Rosner, a senior economist and partner at MacroPolicy Perspectives LLC in New York. “The weakness is pretty broad and it’s partly happening in cyclical areas of the economy that might be slowing, like motor vehicles.”
The cost Americans pay for goods and services was little-changed in June, larger reflecting lower gasoline prices but also showing that a recent surge in inflation has crested.
The consumer-price index, or cost of living, was unchanged last month, the government said Friday. Economists polled by MarketWatch had forecast a 0.1% increase in CPI.
More important, the rate of inflation over the past 12 months slowed 1.6% in June from 1.9% in the prior month, and it is down from five-year high of 2.7% just five months ago.
A significant pickup in inflation still remains tantalizingly out of reach in most developed economies — aside from asset prices — yet several central banks are leaning toward launching or stepping up efforts that could slow it down.
What has shifted in recent months is an acceptance that fiscal policy, touted around the turn of the year as the essential comeback kid after the shock election of Donald Trump as U.S. president, has not yet come back.
PG View: Inflation is the fondest desire of central bankers, and yet they are taking steps to slow inflation that doesn’t exist. The risk is that their efforts stoke disinflation, which is the bane of central bankers and heavily indebted countries.
BusinessInsider/Pedro Nicolaci da Costa/07-05-17
Federal Reserve officials raised interest rates in June despite worries about slowing inflation and job growth, largely because officials were still pretty sure the slowdown would quickly pass.
However, minutes from last month’s policy meeting showed a growing number of policymakers are becoming reluctant about the need for continued monetary policy tightening given the weakening in the data.
“Several participants expressed concern that progress toward the committee’s 2% longer-run inflation objective might have slowed and that the recent softness in inflation might persist,” the minutes said.
PG View: Be sure to click through to the article to see the chart that illustrates how egregiously wrong the Fed has been with regard to forecasting . . .
Americans barely increased spending in May and choose to save more money instead even as decelerating inflation gave them more bang for the buck.
Consumer spending rose 0.1% last month after back-to-back 0.4% gains in April and March, the Commerce Department reported Friday. That matched the Marketwatch forecast of economists.
The meager increase in spending took place against a backdrop of slowing inflation.
PG View: Not typically an environment where the central bank would be tightening policy.
The Federal Reserve should wait on any further rate increases until it is clear inflation is reliably heading to the Fed’s 2 percent target, St. Louis Fed President James Bullard said on Friday, highlighting the central bank’s struggle over how to weigh a recent slip in the rate of price increases.
“Recent inflation data have surprised to the downside and call into question the idea that U.S. inflation is reliably returning toward target,” Bullard said at an Illinois Bankers Association conference. “The Fed can wait and see how the economy develops before making any further adjustments to the policy rate.”
PG View: Kashkari apparently is not alone: Too bad Bullard is a non-voter.
Bank of Japan Governor Haruhiko Kuroda said maintaining the current easy monetary conditions is appropriate because prices are lagging improvements in the economy and remain distant from the central bank’s inflation target.
…”Our economy is on firmer footing, but we are still distant from our 2 percent inflation target,” Kuroda said.
“It is appropriate to keep monetary conditions easy with our current market operations framework.”
Chicago Federal Reserve Bank President Charles Evans said on Tuesday he is increasingly concerned that a recent softness in inflation is a sign the U.S. central bank will struggle to get price pressures back to its 2 percent objective.
“I will say that the most recent inflation data made me a little nervous about that. I think it’s much more challenging from here on out,” Evans said in an interview with broadcaster CNBC.
…If inflation remains in a slump, the Fed may require a shallower path of rate rises, he added.
The gold market was able to resist a fairly optimistic Federal monetary policy statement, but was unable to hold its daily gains after what appeared to be hawkish comments from the Fed Chair Janet Yellen.
While gold has been steadily giving up its early morning gains as the market digested the latest Federal Reserve statement and economic projections, the yellow metal attracted renewed selling pressure as Yellen shrugged off weak inflation concerns.
…While acknowledging that prices pressures are currently weaker than expected, Yellen said that conditions are in place for inflation to eventually pick up.
PG View: I’m not convinced that inflation is really on the verge of picking up, but even if it does, that would be bullish for gold. At this point, I think the market is just a little confused. Those that bought on expectations of a more dovish Fed are moving to the sidelines, it there is indeed evidence of renewed inflation expectations, those investors will be buyers as well.
The U.S. economy has been growing for 96 straight months, its third longest expansion on record, and if this were any previous expansion, the Federal Reserve’s decision on Wednesday would be a no-brainer: It would be time to raise interest rates. The unemployment rate, at 4.3 percent, is at its lowest level since 2001 and job growth has remained strong for this stage of the recovery. Most importantly, the Fed currently has its target rate set at just 0.75-1.00 percent, far below historic levels. After eight years of unusually low interest rates, the conditions appear ripe to bring them back up.
But one critical economic indicator is saying otherwise: inflation. Normally when the economy is humming, inflation starts to rise, but in this case, the Fed’s preferred measure of annual inflation has actually declined for three months in a row, hitting 1.7 percent in April. If you exclude volatile food and energy prices, inflation is even lower, at 1.5 percent. (The Fed’s inflation target is 2 percent.) And on Monday, the New York Federal Reserve reported that consumer inflation expectations had declined as well; expectations for inflation three years from now hit their lowest point since January, 2016.
U.S. inflation expectations tumbled last month, with one key measure hitting its lowest level since early 2016, according to a Federal Reserve Bank of New York survey that could amplify the central bank’s concern over a broad slump in prices.
The survey of consumer expectations, an increasingly valuable gauge for the Fed, showed on Monday that median three-year-ahead inflation expectations fell to 2.47 percent last month, from 2.91 percent in April. That brought the measure to a 16-month low after it had hovered near a record high the last six months.
PG View: Falling inflation expectations has to be particularly vexing to the Fed, after a nearly a decade of near-zero rates and trillions spent on asset purchases with the expressed goal of generating inflation.
The European Central Bank has trimmed its medium-term inflation forecasts despite acknowledging the strength of the eurozone’s accelerating economic growth.
In its latest set of forecasts released today, the ECB said inflation would average at 1.6 per cent in 2019, down from a previous forecast of 1.7 per cent and further below its target of just under 2 per cent (see table above).
Inflation this year would average 1.5 per cent from a previous forecast of 1.7 per cent and fall to just 1.3 per cent next year.
Bloomberg/Paul Gordon & Alessandro Speciale/06-07-17
The European Central Bank is preparing to cut its inflation outlook across its forecast horizon at this week’s policy meeting because of weaker energy prices, according to euro-area officials familiar with the matter.
The ECB’s draft projections now show consumer-price growth at roughly around 1.5 percent each year in 2017, 2018 and 2019, the officials said, asking not to be identified because the information is confidential. The previous projections in March foresaw rates of 1.7 percent, 1.6 percent and 1.7 percent, respectively.
The St. Louis Fed’s Price Pressures Measure has fallen to its lowest reading since February of 2016.
The indicator peaked in February of this year at a 5-year high. That would suggest that if the December 2016 rate hike wasn’t a mistake, the one in March of this year almost assuredly was.
FT/Pan Kwan Yuk/05-30-17
A key measure of US inflation fell for a third straight month in April, easing pressure on the Federal Reserve to step up the pace of interest rate rises beyond the three it has penned in for this year.
The core personal consumption expenditures price index (PCE), eased to a year-on-year pace of 1.5 per cent last month, compared to the 1.6 per cent rate it was at in March, according to data released Tuesday morning by the Commerce Department.
PG View: I’m not sure if this is enough to give the Fed pause…but it probably should…