Tag Archives: Inflation

2008-01-16 EU Highlights

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Overall, inflation and weakness continues:

European Inflation Holds Above 3% as Food Prices Soar
German 2007 Inflation Fastest Since Records Began
France: Inflation up to 2.3% in Q4 sunk real wages, spending
ECB’s Weber Says Shouldn’t `Over-Dramatize’ Inflation Jump
Europe’s Economies Face `Stagflation’ Risk This Year
Weber Says ECB Won’t Tolerate Excessive Pay Increases
European Car Sales Rose in 2007 on New Fiat, BMW Models
German First-Quarter Growth to Slow to 0.3 Percent
Bank of Italy Cuts 2008 Growth Forecast Due to Euro, Inflation
Bank of France Cuts Fourth-Quarter Growth Forecast to 0.4%
French Populace Grows to 63.8 Million, Second-Highest in Europe
Iceland delays banks’ plans to adopt the euro

Good choice.

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Why I expect US exports to continue to be very strong..

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The desire to accumulate $US financial assets has been diminished for at least the following reasons:

  1. Treasury policy – Paulson is actively pushing both a strong yuan and threatening any other CB that buys $US with the label of ‘currency manipulator.’ CB’s had been perhaps the largest source of $US financial assets accumulation and are now limited to compounding of interest.
  2. US foreign policy is probably driving CB’s in less than friendly nations to diversify their reserves away from $US financial assets.
  3. Fed policy has the appearance of a ‘beggar thy neighbor’/’inflate your way out of debt’ policy, as the Fed aggressively cuts rates in the face of inflation not seen in 25 years.

This all sets in motion a downward pricing of the $US as non residents sell them to each other at lower and lower prices in this effort to lower their rate of accumulation of $US financial assets. But these financial assets can only ‘go away’ when they get spent or invested in the US, when US prices are low enough to cause this to happen. The rapid rise in exports and accelerated non resident buying of US real estate and other assets is anecdotal evidence this is taking place as theory predicts.

This is a very large cyclical force that should continue to drive rapidly rising exports for perhaps a year or more. Weak foreign economies should have little effect on this process, as that weakness doesn’t reduce the desire of portfolio managers to shift out of $US financial assets.

This is also highly inflationary for the US. This buying by non residents both drives down the $US and drives up the prices of US exports, now rising at a 7% clip last I checked.

The desired shift is probably well over $1 trillion which means exports will increase by a good part of that to facilitate this transfer.

This can sustain US GDP in the face of falling domestic demand, which will stay relatively low until housing picks up. Employment will remain reasonably good, but standards of living fall as we produce as much, but export more and consume less. We get paid to work but can buy less due to high prices, with our remaining production exported to those wishing to reduce their accumulated $US financial assets.

We’ve been talking about this possibility about a long time, but seems our trade negotiators have finally got their wish.

Meanwhile, Saudis continue to act the swing producer. In fact, they told Bush today they have 2 million bpd capacity in reserve, and that markets are well supplied. At their price, of course.

Probably have been some year end allocations out of crude by pension funds as with the price hikes they would need to sell some to keep the same ‘weight’ in their portfolios. That should be ending soon.

And I agree with Karim, the Fed is not likely to act on inflation until core starts to rise or their measures of inflation expectations start to rise, despite the fact that mainstream theory clearly says if any of that happens it’s too late. Seems to me the senior FOMC members are putting their jobs on the line by taking that kind of systemic risk, which their own theory tells them is far higher than the risk of any lost output from a .

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Re: more on receipts

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(an interoffice email)

On Jan 15, 2008 9:23 AM, Karim Basta wrote:
>
>
>
> US Daily Comment – Tax Receipts: How Good an Indicator?
> Summary: Although Treasury income tax receipts are a popular measure of
> economic activity, they are generally too noisy and susceptible to calendar
> distortions to be very informative. Indeed, the recent strength in
> withholding tax receipts in the fourth quarter (+10.5% year-on-year) seems
> to be largely due to an extra Monday during the quarter. Adjusting for this
> factor, year-on-year growth in withholdings was about 6% year-on-year,
> roughly 3 percentage points below the 2006-2007 average and broadly
> consistent with the data on employment and earnings. In contrast, state
> sales tax receipts are a quite useful measure. While less timely, they are
> also less noisy than income tax receipts and provide information on one
> issue that is poorly covered in the standard economic data, namely
> consumption at a regional level. Recent trends in sales tax receipts are
> consistent with a more substantial consumption slowdown than suggested by
> the national consumption and retail sales data, especially in states hard
> hit by the housing crisis.

Thanks!

Agreed.

Fed tax receipts have been slowing for a year or so, but no sudden drop at year end, just a continuation of the general downslope. Haven’t seen the sales tax graph, but should also reflect gradual fall off in demand.

Twin themes remain: weakness and higher prices.

PPI finished year with largest gain since coming off higher numbers in the early 80’s, and probably 10 years before that when they hit 6% + on the way to higher levels.

Demand is definitely on the weak side, but strong enough to generate alarming price increases in food/fuel/imports/exports.

warren

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If it isn’t inflation, what is it?

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What we used to call an ‘inflation day’ –

  • $ down/oil up
  • Gold through 900- if nothing else, it’s an inflation expectation indicator (not that they cause anything, just reflect it)
  • Other metals up
  • Grains going parabolic
  • Stocks up

also,

  • Export driven growth means demand coming from and output going to non residents, rather than retail sales and other domestic consumption.
  • Changes of portfolio currency preferences away from the $US are driving the dollar down to low enough levels where non residents buy here to use up some of their $US financial assets.
  • Japan/mof (and others) would probably like to buy $ to keep the yen from rising and hurting their exports, but Paulson has warned the world CB’s that this makes them ‘currency manipulators’ and subject to criticism.

This is an explicit weak $ policy that is probably altering CB portfolio preferences and inducing price pressures on our imports.

The Fed is sending signals it’s fine with this kind of inflation at least as long as they are forecasting the risk of weaker domestic demand as a result (somehow) of financial concerns. And because they analyze the risks as if we had a fixed exchange rate they see the risks of supply side credit issues as those of the great depression of the 1930’s. Doesn’t happen with today’s floating fx.

Don’t know when/if the Fed ‘figures it out’ but the curve can go from wherever it is to seriously negative should the Fed hike aggressively to ‘get ahead of the inflation curve.’

The inflation is coming from non monetary sources – monopolist pricing in oil, biofuels linking food to fuel, portfolio shifts out of $US due to US political rhetoric and apparent Fed policy of inflating your way out of debt without concern for the value of the currency. Enough to scare any portfolio manager out of $US risk.

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Trade numbers

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U.S. Trade Deficit Hits 14-Month High on Oil Imports

by Reed Saxon

The U.S. trade deficit in November surged to the highest level in 14 months, reflecting record imports of foreign oil. The deficit with China declined slightly while the weak dollar boosted exports to another record high.

The Commerce Department reported that the trade deficit, the gap between imports and exports, jumped by 9.3 percent, to $63.1 billion. The imbalance was much larger than the $60 billion that had been expected.

The increase was driven by a 16.3 percent surge in America’s foreign oil bill, which climbed to an all-time high of $34.4 billion as the per barrel price of imported crude reached new records. With oil prices last week touching $100 per barrel, analysts are forecasting higher oil bills in future months.

The big surge in oil pushed total imports of goods and services up by 3 percent to a record $205.4 billion. Exports also set another record, rising by a smaller 0.4 percent to $142.3 billion. Export demand has been growing significantly over the past two years as U.S. manufacturers and farmers have gotten a boost from a weaker dollar against many other currencies. That makes U.S. goods cheaper on overseas markets.

Exports still moving up.

Through the first 11 months of 2007, the deficit is running at an annual rate of $709.1 billion, down 6.5 percent from last year’s all-time high of $758.5 billion. Analysts believe that the export boom will finally result in a drop in the trade deficit in 2007 after it set consecutive records for five years.

Agreed. Ultimately, the only way the foreign sector can slow their accumulation of $US, as the falling $ indicates they are in the process of doing, is to spend it here.

The growth in exports has been a major factor cushioning the blow to the economy from the slump in housing and a severe credit crunch. However, with oil pushing imports up sharply, analysts believe the help from trade in the final three months of last year will be shown to have been significantly smaller.

Could be. December numbers will not be out for another month.

By country, the deficit with Canada, America’s largest trading partner, dropped by 12.1 percent to $4.7 billion in November while the imbalance with Mexico rose by 1.4 percent to $7.6 billion. The imbalance with the European Union fell by 12.6 percent to $10.4 billion.

Might explain some weakness in Canada and Eurozone.

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Re: Bernanke

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(email)

On 11 Jan 2008 11:17:34 +0000, Prof. P. Arestis wrote:
>   Dear Warren,
>
>   Many thanks. Some good comments below.
>
>   The paragraph that I think is of some importance is this:
>
> >  The Committee will, of course, be carefully evaluating incoming
> >  information bearing on the economic outlook. Based on that evaluation,
> >  and consistent with our dual mandate, we stand ready to take
> >  substantive additional action as needed to support growth and to
> >  provide adequate insurance against downside risks.
>
>   If I am not wrong this is the first time for Bernanke that the word
>   inflation does not appear explicitly in his relevant statement. But also
>   there is no mention of anything relevant that might capture their motto
>   that winning the battle against inflation is both necessary and sufficient
>   for their dual mandate.
>
>   Are the economic beliefs of BB changing, I wonder? I rather doubt it but
>   see what you think.

Dear Philip,

I see this is all part of the Bernanke conumdrum.

Implied is that their forecasts call for falling inflation and well anchored expectations, which can only mean continued modest wage increases.

They believe inflation expectations operate through two channels-accelerated purchases and wage demands.

Their forecasts use futures prices of non perishable commodities including food and energy. They don’t seem to realize the
‘backwardation’ term structure of futures prices (spot prices higher than forward prices) is how futures markets express shortages.

Instead, the Fed models use the futures prices as forecasts of where prices will be in the future.

So a term structure for the primary components of CPI that is screaming ‘shortage’ is being read for purposes of monetary policy as a deflation forecast.

Bernanke also fears convertible currency/fixed fx implosions which are far more severe than non convertible currency/floating fx slumps. Even in Japan, for example, there was never a credit supply side constraint – credit worthy borrowers were always able to borrow (and at very low rates) in spite of a near total systemic bank failure. And the payments system continued to function. Contrast that with the collapse in Argentina, Russia, Mexico, and the US in the 30’s which were under fixed fx and gold standard regimes.

It’s like someone with a diesel engine worrying about the fuel blowing up. It can’t. Gasoline explodes, diesel doesn’t. But someone who’s studied automobile explosions when fuel tanks ruptured in collisions, and doesn’t understand the fundamental difference, might be unduly worried about an explosion with his diesel car.

More losses today, but none that directly diminish aggregate demand or alter the supply side availability of credit.

And while the world does seem to be slowing down some, as expected, the call on Saudi oil continues at about 9 million bpd,
so the twin themes of moderating demand and rising food/fuel/import prices remains.

I also expect core CPI to continue to slowly rise for an extended period of time even if food/fuel prices stay at current levels as
these are passed through via the cost structure with a lag.

All the best,

Warren

>
>  Best wishes,
>
>  Philip

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Comments on Bernanke speech

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Although economic growth slowed in the fourth quarter of last year from the third quarter’s rapid clip, it seems nonetheless, as best we can tell, to have continued at a moderate pace.

Q4 GDP seen as ‘moderate’ – that is substantially better than initial expectations of several weeks ago.

Recently, however, incoming information has suggested that the baseline outlook for real activity in 2008 has worsened and the downside risks to growth have become more pronounced.

They initially said this for Q3 and for Q4.

Notably, the demand for housing seems to have weakened further, in part reflecting the ongoing problems in mortgage markets.

Maybe, but even if so, housing is now a much smaller influence on GDP.

In addition, a number of factors, including higher oil prices,

Yes, this slows consumer spending on other items, but oil producers have that extra income to spend, and if they continue to do so, GDP will hold up and exports will remain strong.

lower equity prices, and softening home values, seem likely to weigh on consumer spending as we move into 2008.

The fed has little if any evidence those last two things alter consumer spending.

Financial conditions continue to pose a downside risk to the outlook for growth.

Market participants still express considerable uncertainty about the appropriate valuation of complex financial assets and about the extent of additional losses that may be disclosed in the future. On the whole, despite improvements in some areas, the financial situation remains fragile, and many funding markets remain impaired. Adverse economic or financial news has the potential to increase financial strains and to lead to further constraints on the supply of credit to households and businesses.

Yes, his main concern is on the supply side of credit. With a floating fx/non convertible currency, there is a very low probability. Even Japan with all its financial sector problems was never credit constrained.

Debilitating credit supply constraints are byproducts of convertible currency/fixed fx regimes gone bad, like in the US in the 1930s, Mexico in 1994, Russia in 1998, and Argentina in 2001.

I expect that financial-market participants–and, of course, the Committee–will be paying particular attention to developments in the housing market, in part because of the potential for spillovers from housing to other sectors of the economy.

A second consequential risk to the growth outlook concerns the performance of the labor market. Last week’s report on labor-market conditions in December was disappointing, as it showed an increase of 0.3 percentage point in the unemployment rate and a decline in private payroll employment. Heretofore, the labor market has been a source of stability in the macroeconomic situation, with relatively steady gains in wage and salary income providing households the wherewithal to support moderate growth in real consumption spending. It would be a mistake to read too much into any one report.

Right, best to wait for the revisions. November was revised to a decent up number, and October was OK as well. And today’s claims numbers indicate not much changed in December.

However, should the labor market deteriorate, the risks to consumer spending would rise.

Yes, if..

Even as the outlook for real activity has weakened,

Yes, the outlook has always been weakening over the last six months, while the actual numbers subsequently come in better than expected. Seems outlooks are not proving reliable.

there have been some important developments on the inflation front. Most notably, the same increase in oil prices that may be a negative influence on growth is also lifting overall consumer prices and probably putting some upward pressure on core inflation measures as well.

Interesting that he mentions upward pressure on core – must be in their forecast. It took them a long time to get core to moderate, and even in August they did not cut as upward risks remained.

Last year, food prices also increased exceptionally rapidly by recent standards, further boosting overall consumer price inflation. Thus far, inflation expectations appear to have remained reasonably well anchored,

They have very little information on this. They only know when they become unglued, and then it is too late.

and pressures on resource utilization have diminished a bit. However, any tendency of inflation expectations to become unmoored or for the Fed’s inflation-fighting credibility to be eroded could greatly complicate the task of sustaining price stability and reduce the central bank’s policy flexibility to counter shortfalls in growth in the future.

Meaning once they go, it is too late.

Accordingly, in the months ahead we will be closely monitoring the inflation situation, particularly as regards inflation expectations.

The fed has no credibility here. Markets ignore this, and the financial press does not even report it.

Monetary policy has responded proactively to evolving conditions. As you know, the Committee cut its target for the federal funds rate by 50 basis points at its September meeting and by 25 basis points each at the October and December meetings. In total, therefore, we have brought the funds rate down by a percentage point from its level just before financial strains emerged. The Federal Reserve took these actions to help offset the restraint imposed by the tightening of credit conditions and the weakening of the housing market. However, in light of recent changes in the outlook for and the risks to growth, additional policy easing may well be necessary.

Reads a bit defensive to me.

The Committee will, of course, be carefully evaluating incoming information bearing on the economic outlook. Based on that evaluation, and consistent with our dual mandate, we stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks.

Financial and economic conditions can change quickly. Consequently, the Committee must remain exceptionally alert and flexible, prepared to act in a decisive and timely manner and, in particular, to counter any adverse dynamics that might threaten economic or financial stability.

This was to come out at 1PM, instead it was released at noon.

This seems they meant to send a signal that they are ready to go 50.

It may take another 0.3% core CPI number, low claims numbers, and further tightening of the FF/LIBOR spread to get them to think twice about not cutting.

Their fixed fx paradigm supply side fears elevates their perception of the downside risks.

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ECB Mersch on inflation

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ECB’s Mersch Says Oil Must Not Boost Other Prices

by Simone Meier

(Bloomberg) European Central Bank council member Yves Mersch said a surge in oil prices must not be allowed to lead to permanently faster inflation, Luxembourg’s Wort newspaper reported, citing an interview.

Yes, that is the mainstream view – don’t turn a relative value story into an inflation story.

“Of course we can do something against” faster inflation, Mersch, who is also governor of Luxembourg’s central bank, said in the interview, according to Wort. “We have to prevent temporary price increases, as we see with oil, from permanently impacting on the overall level of prices.”

It already has started to do this via biofuels and increased costs of production. Food prices are up, and other prices are facing upward pressure.

Rising oil prices are “like a tax,” Mersch told the newspaper. “If someone is taxing us, we all become poorer. If we refuse to become poorer, we’re not creating any purchasing power but only inflation,” the newspaper quoted him as saying.

Yes by keeping it a relative value story by limiting demand, real terms of trade deteriorate making the nation ‘poorer’.

“We have to watch out that other sectors and services don’t become infected” by rising prices, Mersch said, according to Wort.

Demand has to be kept low enough to not let a relative value story become an inflation story.

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3 mo libor down to 4.44%

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3 mo libor is now for all practical purposes is ‘under control’ and down about 50 bp since the last Fed meeting.

Market function risk seems to be behind us, and the talk has now shifted to weakness due to softer demand.

The question is what level of demand is consistent with ‘price stability’.

In other words, to not exceed potential non inflationary GDP (the Fed’s speed limit) demand has to be low enough to not continuously drive up food/fuel/import prices.

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Plosser the hawk on the tape

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This is the most hawkish Fed pres:

GLADWYNE, PENNSYLVANIA (Thomson Financial) – The head of the Philly Fed, Charles Plosser, today raised the possibility of a stagflation threat to the US economy.

“Although I am expecting slow economic growth for several quarters, we should not rely on slow growth to reduce inflation,” the Philadelphia Federal Reserve Bank president warned in a speech here. “Indeed, the 1970s should be a sufficient reminder that slow growth and falling inflation do not necessarily go hand in hand.” Plosser, who has a vote on the rate-setting Federal Open Market Committee this year, warned that he is getting increasingly worried about inflation. “Recent data suggest that inflation is becoming more broad-based,” he said, “And recent increases do not appear to be solely related to the rise in energy prices. Consequently I see more worrisome signs of underlying price pressures.” Plosser also used today’s speech to draw a clear line between what the Fed should do to stabilize the economy and what it should do to stabilize financial markets.

He believes the Fed’s three rate cuts will take time to work through the economy and that in the meantime growth will slow.

“Since monetary policy’s effects on the economy occur with a lag, there is little monetary policy can do today to change economic activity in the first half of 2008.” In the meantime, “we will get some bad economic numbers from various sectors of the economy in the coming months,” he added.

But beyond the immediate short term, Plosser was more optimistic. He reckons the economy will “improve appreciably by the third and fourth quarters of 2008, and that is when any monetary policy action today will begin to have noticeable effects.” On the credit market front, the Fed’s new Term Auction Facility (TAF) program should help stabilize financial markets and provide liquidity when the interbank lending markets “are under stress and not functioning smoothly,” he added.

Plosser said early evidence suggests the first two 20 bln usd auctions were successful. Two more have been scheduled later this month.

The key point, he said, is that “the TAF did not change the stance of monetary policy. The Fed actually withdrew funds through open market operations as it injected term liquidity through the TAF.” Plosser was already known as one of the inflation “hawks” among the regional Fed bank presidents. His analysis confirms a preference for avoiding further rate cuts and the risk of further inflation as long as financial markets problems do not pose a danger to the rest of the economy.

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