And if anyone knows a thing or two about accommodative monetary conditions, it’s Japan.
The report certainly gives credit to global economic growth for pushing up commodities, but it also says “speculative investment flows into commodity markets have amplified the intensity of the price surge.”
Here’s a sentence from the summary that should have Bernanke, Dudley and other deniers at the Fed turning crimson: “Furthermore, globally accommodative monetary conditions have played an important role in the surge in commodity prices, both by stimulating physical demand for commodities and driving more investment flows into financialized commodity markets.”
Economists seem generally unfazed by the drop in ISM’s March non-manufacturing index, with most rationalizing that after some strong gains it was due to ease, and all readings still signal expansion.
Goldman Sachs noted the headline decline “was driven by a sharp drop to 59.7 from 66.9 in the business activity index — the biggest drop since late 2008 — which is the component we have found to be most closely correlated with GDP growth.”
Firm notes it’s “the first meaningful disappointment in a business survey in several months, so it deserves some attention.” Nomura points out that the decline narrows “the general divergence” seen recently “between hard data and survey-based data.”
Our favorite observation following the ISM services report comes from RDQ Economics, aimed at the Fed’s tale on rising commodity prices.
“The broad-based nature of price increases make the Fed’s assertion that commodity price increases are demand driven and have nothing to do with ultra-easy monetary policy nonsensical,” the firm said. To further illustrate the absurdity, roofing shingles were listed in the report among commodities reported “up in price.” Roofing shingle prices “are rising in the U.S. because of demand even though there is very little building going on?” RDQ very appropriately wonders.
Which brings us once again to Chairman Bernanke and his comments last night. Newswires Michael Derby reported that Bernanke said that the rise in global commodity prices — which is all demand driven, mind you — will be transitory and prices “will eventually stabilize.”
If you buy the Fed’s demand-driven thesis, then demand — particularly in Asia and emerging markets — needs to cool off a lot, and cool off quick in order for commodity price gains to prove to be temporary. The necessary sharp pullback in global growth, and particularly in emerging-market growth, is not a widely held view, as far as we’re aware.
The run-up in commodity prices may indeed prove temporary, but only after the Fed finishes with QE II and then begins to signal an interest in drawing down the liquidity it’s poured into the global financial system.
U.S. consumers face “serious” inflation in the months ahead for clothing, food and other products, the head of Wal-Mart’s U.S. operations warned Wednesday.
Still, inflation is “going to be serious,” Wal-Mart U.S. CEO Bill Simon said during a meeting with USA TODAY’s editorial board. “We’re seeing cost increases starting to come through at a pretty rapid rate.”
Along with steep increases in raw material costs, John Long, a retail strategist at Kurt Salmon, says labor costs in China and fuel costs for transportation are weighing heavily on retailers. He predicts prices will start increasing at all retailers in June.
“Every single retailer has and is paying more for the items they sell, and retailers will be passing some of these costs along,” Long says. “Except for fuel costs, U.S. consumers haven’t seen much in the way of inflation for almost a decade, so a broad-based increase in prices will be unprecedented in recent memory.”
Long mentions June, which is incidentally right around the time the Fed’s bond-buying program ends. That’ll be a peachy combination for the consumer and the stock market, won’t it?
I don’t know if I have or even need to comment on this story about the Fed and “core” inflation in today’s Wall Street Journal, but I have to at least point to it. It amplifies a point we made last week as well.
From the Journal:
As gasoline prices surge, Federal Reserve Chairman Ben Bernanke is changing his tune when discussing inflation in public—in part to avert criticism that central bankers are out of touch with consumers.
Fed officials have for years cited “core inflation,” a measure that excludes food and energy prices. That is because core inflation tends to be a useful predictor of inflation over a couple of years, which they call the medium term, a period that is key to monetary-policy decisions. But this focus has drawn criticism that Fed officials aren’t facing economic reality, as if they don’t eat or drive.
Now, Mr. Bernanke is taking another tack in his public communications. In two days of testimony on Capitol Hill earlier this month, the Fed chairman never uttered the words “core inflation” while explaining the central bank’s aims and policies. Instead of citing a specific measure, he emphasized the Fed’s time frame.
This follows up William Dudley’s iPad line in Queens, N.Y., last week, when he tried to explain away inflation by point to iPad prices. The crowd wasn’t buying it. People don’t think the Fed has any real clue about actual, real-world inflation. The Fed feels this stinging criticism, so it addresses that criticism by…altering its language.
Unless the Fed’s utilization of time frames can bring down gas and food prices — and who knows, maybe it can — this linguistic tack isn’t going to change many people’s minds.
You can’t eat an iPad, no matter how long you own it.
Posted by Paul Vignaon March 11, 2011 Inflation, Markets /
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Obviously, Japan is the big story, the very big story. But there’s something else worth pointing out today: inflation expectations here in the U.S. In short, they are rising, maybe faster than the Fed expected, and that may create problems for the central bank that it wasn’t exactly expecting to face this soon.
This is perhaps best illustrated by the story of William Dudley, the head of the New York Fed, who took a trip across the East River this morning to speak to the Queens Chamber of Commerce. You can read about his prepared remarks in this WSJ write-up by Newswires’ Michael Derby. But the really interesting part occurred when he took questions from the audience. Derby elaborates:
New York Fed President Dudley just faced down a Queens, N.Y., audience that was having a hard time buying his contention inflation is low and likely to stay that way.
He was challenged by one audience member, who said, “when was the last time, sir, you went grocery shopping?” Dudley responded “I certainly acknowledge food prices have gone up.” But he added some prices are lower and he noted “today you can buy an iPad 2 that costs the same as an iPad 1, that’s twice as powerful,” as an example of favorable price dynamics.
His example was greeted with widespread grumbling in the audience, in an unusual display of discontent at a Fed speech. Dudley’s struggle is a harbinger of the trouble policymakers are likely to face over coming months, amid the good chance food and energy prices are on a sustained move higher.
Posted by Paul Vignaon March 01, 2011 Federal Reserve /
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Our colleague Michael Derby has this overview of Fed Chairman Ben Bernanke’s testimony up on Capitol Hill this morning:
In testimony before Congress, Fed Chief Ben Bernanke says he sees a continued US recovery and expects inflation to stay contained. But he also warns sustained commodity-price increases could threaten the recovery and warns the central bank won’t allow inflation to take hold. Most of Bernanke’s comments on the outlook hew closes to things he and other Fed officials have said. Put another way, the remarks are no game changer, although they do reflect the increased attention paid to commodity prices.
The two most interesting topics today and tomorrow are likely to be the end of QE2, and commodity prices. On the former, you may get a hint or two, but that’ll be it. On the latter, the Fed chairman is still holding to his opinion that Fed policies are not the cause of the inflationary wave that’s spreading across the globe.
I just don’t know where to go with that. The Fed’s been trying like madmen for the past two years to spark inflation, given they’re terrified of deflation. The dollar is the world’s reserve currency. Most markets trade in dollars. Bernanke can do the “Huh? Wha? Don’t look at me” bit, but it’s not a very convincing act.
Posted by Paul Vignaon February 24, 2011 Economy, Inflation /
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Just a little off the top, please.
Inflation? What inflation? Oh, you mean that inflation.
Even as Fed chairman Ben Bernanke continues to insist that inflation is “quite low,” facts on the ground, as they say, are painting a different picture.
First, there’s gas. Crude oil prices are spiking on the Mideast revolts, and gas prices don’t even reflect this week’s move; that will take a few weeks to filter down to the pump in your town.
Don’t be surprised if prices are about a quarter higher by mid-March. So if the national average is about $3.23 right now, it could be pushing $3.50 soon. That’ll be great fuel for the economy.
But it’s not just gas, it’s food, too. The USDA today said it expects food prices will be 3-4% higher in 2011. “Rising grain, livestock and energy costs are pressuring food manufacturers, restaurants and supermarkets to pass along higher costs even though postrecession consumers are leery about paying more,” the Journal’s Scott Kilman writes. The government agency said retail ground beef and steak prices were up 9.9% and 9.8% from a year ago, respectively. Retail pork prices were up 9.9%.
Maybe 3-4% doesn’t sound so bad to you. But is your salary going up 3-4% this year? Do you still have a salary?
Posted by Paul Vignaon February 23, 2011 Federal Reserve /
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Newswires’ Veronica Dagher interviews Charles Schwab’s Liz Ann Sonders about inflation, its effect on the economy and whether the Fed’s going to get in front of it in time to arrest its rise.
- January CPI “completes a trifecta of inflation reports that showed both overall and core inflation ahead of expectations,” RDQ Economics writes. “The Fed remains focused on core inflation at the consumer level, which it thinks will be restrained by high unemployment, and largely dismisses higher food, energy, and commodity prices as being influenced by the ultra loose stance of monetary policy,” firm says.
“We are not Phillips Curvers and we are increasingly concerned that inflation is headed higher.” RDQ notes evidence in latest report “that even core CPI inflation has bottomed and has begun to move higher,” and price increases “were fairly broad-based.”
- Weekly initial jobless claims “were worse than expected rising to 410k (400k consensus), but that gain was from a weather induced low of 385k, a number that was not real,” writes Eric Green, chief US rates strategist at TD Securities. “What is real is that the weather distortions are now purged from the claims data and we are left at a 4 week moving average of 417k, essentially unchanged from last week,” he notes. “We need to get below 400k and stay there if the market is to buy in to sustained improvement in the labor market.” Continue reading…
That’s not the headline they used over at WSJ.com for this video, but they should’ve. So catchy, don’t you think?
In an interview with DJ Wealth Adviser’s Veronica Dagher, economist Bob Baur at Principal Global Investors touches on a couple of subjects dear to our heart, including how rising food prices are a destabilizing force, the state of the U.S. economy, inflation, and how flat wages are holding it down.
J.P. Morgan reported some strong earnings today. But what this bloggers eye were some of the sub-numbers in the earnings report. The bank booked $1.8 billion in investment banking fees. But don’t be fooled – that wasn’t from big M&A advising. But $429 million was in advisory fees. Instead, that $1.3 billion + remaining fees […]
The bridge that collapsed on Interstate 5 bridge over the Skagit River in Washington was listed as “functionally obsolete” and “fracture critical,” which means the whole sha-bang could come tumbling down if one major part fails. Click here to read the details from USAToday. This sort of thing shouldn’t be happening in a modern, developed nation. Barry LePatn […]
