Posted on July - 25 - 2011
Based on March inflation, the U.S. Federal Reserve’s job just got harder
The March U.S. inflation numbers released by the Department of Labour have suddenly altered the framing landscape for the debate on monetary policy. There are four numbers to key on each time the month-to-month and year-over-year changes of both the all-items and core indices.
The only good news for the Federal Reserve in the latest months table of numbers was the fall in the core index change month to month, from +0.2% in February to +0.1% in March. The all-items index stayed strong month to month in March, at +0.5%, the same as in the previous period.
On a year-over-year basis, the core index picked up a little speed, moving from +1.1% to +1.2%. But it was the all-items index where the change was most noticeable. The all-items consumer price index in March accelerated to +2.7% year-over-year from a relatively restrained +2.1% in February.
We in North America may be alarmed at the higher crude oil prices, but consider what is happening in Europe. There are two highly publicized benchmark prices for world oil. In North America, its the West Texas Intermediate spot rate. In Europe, its the North Sea Brent price.
The price of the former has been testing $110 USD per barrel. The latter, however, has exceeded $120 USD per barrel. European supplies have been placed in more jeopardy due to shipment interruptions in Libya and threats to supply in other Arab nations on account of popular uprisings. Other reasons for the price disparity include declining production at wells in the North Sea versus abundant inventories of crude oil at tank farms in Cushing, Oklahoma.
The latest inflation reading in Europe was +2.6%, up from +2.0% at the start of the year. In response to the pick-up in prices, the European Central Bank raised its key policy-setting rate from 1.00% to 1.25%. Decisions about rate setting in the U.S. have just been made a lot harder.
Gasoline prices in the U.S. in March were +27.5% year over year. While this stood out among sub-indices, there was also a significant upward drift in food for consumption at home, +3.6%.
The decline in value of the American dollar since March 2009 has also added some upward bias to the CPI. This occurs by way of increasing the price of imports. This effect will magnify if the U.S. Federal Reserve continues to keep interest rates low while other central banks take action.
Higher commodity prices world-wide have been foreshadowing a pickup in inflation. This has already been apparent in a number of countries. Indias latest inflation reading was 8.98%. In China, a 5.0% gain has led to several interest rate hikes and other credit-tightening measures.
Wholesale price inflation in Germany just quickened to +10.9%, its fastest pace since 1981. In Brazil, the government is taking steps to deal with an inflation rate that is set to bust through +6.5%. A tax on consumer loans is being doubled from 1.5 % to 3.0% to reduce borrowing.
At a recent meeting of the BRICS nations Brazil, Russia, India, China and South Africa the leaders of the five breakout nations called for greater world-wide regulation of derivatives markets. The goal would be to reduce speculation and price volatility in commodities trading.
The Fed is loath to raise interest rates while the labour market has recovered only about one-fifth of its recession-induced job losses. But in a range of 0.00% to 0.25%, the federal funds rate is becoming increasingly out of step with what is happening elsewhere in the world.
Maybe the Fed will take encouragement from the latest U.S. retail trade numbers. At + 7.1% year over year, these showed American households regaining the confidence to spend more freely. If this is truly a return to more normal patterns, a rate hike will not bring the recovery to a halt.
Finally, a key milestone for U.S. retail sales was reached in February of this year. The level of total retail spending in the nation climbed back above its peak from before the recession. Each month-to-month change moving forward, provided its positive, will set a new all-time record.
U.S. INFLATION: ALL ITEMS (CPI-U) VS ALL ITEMS LESS FOOD AND ENERGY (NOT SEASONALLY ADJUSTED) U.S. RETAIL SALES – THREE MONTHS SMOOTHED
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