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…
BusinessInsider/Pedro Nicolaci da Costa/05-16-17
Goldman Sachs chief economist Jan Hatzius has become distinctly less confident in his expectation that the Federal Reserve will raise interest rates twice more this year and make a major announcement about reducing its bond holdings.
Hatzius’ skepticism is due to US inflation, which has been undershooting the Fed’s 2% official target for most of this economic recovery, and continues to lag despite constant warnings to the contrary.
…”We have shaved our subjective odds of a June rate hike to 80%, from 90% earlier, and have also become a bit less confident in a September hike,” Hatzius added. “If the outlook deteriorates significantly, the committee might simply delay any further tightening steps.
A “noticeable softening” in US inflation over the past two months ratchets up the pressure on the Federal Reserve to defend its rate rise plans, Pimco said on Monday as it reduced its target for price growth this year.
A disappointing reading on consumer price growth in March may have seemed like a one-time blip, but a repeat performance the following month raised eyebrows at the big US bond manager.
“…unlike in March – when weakness was primarily attributable to the largest-ever monthly decline in wireless services – April’s weakness was broad-based, reflecting softness in a range of core goods and services,” said chief US economist Tiffany Wilding.
For the 3rd month in a row, US Producer Prices have risen at a faster rate than The Fed’s mandate. April healdine PPI rose 2.5% YoY – the most since Feb 2012, and well above the highest anayst estimate, despite disinflationary credit impulse pressures from China being seen in industrial metals. The biggest driver is surging costs for investment advice!
…So Q1 saw The Fed hike as GDP growth plummeted (weakest quarterly growth for a rate hike since 1980) and inflation surged… this won’t end well.
BusinessInsider/Pedro Nicolaci da Costa/05-03-17
[I]nvestors may have been missing a rather dovish signal sent by the Fed, and one crucial to the future path of interest rates: A rather sheepish description of inflation.
…This is really important because the Fed views both core inflation and inflation expectations, especially market-based ones, as particularly good predictors of future inflation.
Yes, this is a Federal Reserve that appears bent on raising interest rates even if economic conditions, while treading water, are hardly booming in a way that might generate too much inflation.
But if either inflation or inflation expectations edge too much lower, expect the dovish chatter to begin returning from some of the Fed’s more influential quarters.
Oil fell a sixth day as the ramp-up of U.S. drilling signaled further production gains in the world’s biggest crude-consuming nation.
Futures extended last week’s 6.7 percent decline in New York. U.S. explorers added 5 rigs last week to cap the longest stretch of gains since 2011, Baker Hughes Inc. data show. An OPEC committee concluded that a six-month renewal of an output-cut deal is needed, delegates with knowledge of the matter said. Money managers boosted wagers that U.S. oil futures would increase in the week to April 18, government data showed. Oil rose earlier along with global equities while the dollar weakened after the first round of the French presidential election.
BusinessInsider/Pedro Nicolaci da Costa/04-17-17
The Fed’s June rate hike is suddenly sliding off the table.
…The possibility that inflation was finally moving higher, which had been the main justification for the central bank’s stated desire to push interest rates higher, suddenly disappeared as consumer prices fell in March for the first time in over a year. Core prices, which exclude food and energy costs and are closely watched by Fed officials, also slipped 0.1%, making for their first decline since January 2010.
At the same time, US retail sales, a key barometer of growth for an economy two-thirds reliant on consumer spending, fell for a second straight month.
Crisis-stricken Venezuela’s money supply has surged over 200 percent in a year, its fastest rise since records began in 1940, putting it on track for what is likely the world’s highest inflation.
Soon after a month-long hiatus from publication, the central bank said late on Friday the total amount of local currency in circulation – known as M2 by economists – as of March 24 was 13.3 trillion bolivars, up 202.9 percent from a year earlier.
In contrast, the United States’ money supply was up 6.4 percent in the same period.
Venezuela is in a major economic crisis, with millions struggling with food shortages and inflation thought to be in triple digits – though no official data is available.
BusinessInsider/Pedro Nicolaci da Costa/03-15-17
His argument was fairly straight forward: Why tighten monetary conditions when inflation remains below the Fed’s target, inflation expectations are subdued, and the job market is probably still not operating at its full potential despite the low jobless rate?
…Add to that the uncertainty generated by some of the recent political chaos in Washington, and the case for a near-term Fed rate hike becomes much less compelling.