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Wednesday, February 14, 2018

Analysis: U.S. consumer prices accelerate

February 14, 2018 15H:05 GMT/UTC/ZULU TIME

by Judith Stein and Biodun Iginla, BBC News and Reuters Financial Analysts, Washington DC

WASHINGTON - U.S. consumer prices rose more than expected in January, with a measure of underlying inflation posting its biggest gain in a year, strengthening expectations that price pressures will accelerate this year and prompt a faster pace of interest rate increases from the Federal Reserve.

FILE PHOTO: A Walmart employee helps a customer navigate a flyer at the store in Broomfield, Colorado November 28, 2014. REUTERS/Rick Wilking/File Photo

The fairly strong inflation report from the Labor Department on Wednesday could put more pressure on U.S. financial markets, which were spooked by a surge in annual wage growth in January.

Inflation concerns sparked a sell-off on Wall Street and boosted benchmark U.S. Treasury yields to a four-year high.

There are fears that inflation, which is seen as being driven by a tightening labor market and increased government spending, could force the Fed to be a bit more aggressive in raising rates this year than is currently anticipated. That would slow economic growth. The U.S. central bank has forecast three rate hikes for this year, with the first increase expected in March.

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The Labor Department said its Consumer Price Index increased 0.5 percent last month as households paid more for gasoline, rental accommodation and healthcare. The CPI rose 0.2 percent in December. The year-on-year increase in the CPI was unchanged at 2.1 percent as the large price gains from last year dropped out of the calculation.

Excluding the volatile food and energy components, the CPI shot up 0.3 percent. That was the largest increase since January 2017 and followed a 0.2 percent rise in December.

The year-on-year rise in the so-called core CPI was unchanged at 1.8 percent in January, also because of less favorable base effects.

Economists polled by us at Reuters had forecast the CPI increasing 0.3 percent in January and the core CPI rising 0.2 percent. The core CPI is viewed as a better measure of underlying inflation trends. The Fed tracks a different index, the personal consumption expenditures price index excluding food and energy, which has consistently undershot the central bank’s 2 percent target since mid-2012.

FILE PHOTO: A woman shops at an H&M store in New York City, U.S. December 23, 2017. REUTERS/Stephanie Keith/File Photo

INFLATION BUILDING UP

Base effects will turn more favorable in March, which economists say would set the course for higher annual inflation readings. Average hourly earnings jumped 2.9 percent on an annual basis in January, the largest rise since June 2009, from 2.7 percent in December.

A pickup in wage growth as the labor market hits full employment is expected to contribute to higher inflation this year. Price pressures are also seen being fanned by fiscal stimulus in the form of a $1.5 trillion tax cut package and increased government spending.

Last month, gasoline prices rebounded 5.7 percent after falling 0.8 percent in December. Crude oil prices surged in January on strong global demand and a weaker U.S. dollar. Food prices rose 0.2 percent in January, likely reflecting dollar depreciation.

Tuesday, January 9, 2018

Analysis: Mexico closes 2017 with highest inflation in 16 years

10 January 2018 - 00H48 GMT/UTC/ZULU TIME

by Renee Celeste and Biodun Iginla, France24 Financial News Analysts, Mexico City

MEXICO CITY -

Mexico registered its highest annual inflation rate in more than 16 years in 2017, according to official data released Tuesday, piling pressure on policy makers to reign in prices.

The annual inflation rate was 6.77 percent at the end of December, driven by rising energy and food prices, said the national statistics institute.

That was the highest since May 2001, and closed out a turbulent year for Latin America's second-largest economy.

The news increased expectations that the central bank will raise interest rates yet again at its next monetary policy meeting on February 8.

It also stoked concern that high prices could become a hot-button issue in general elections to be held on July 1.

"Stubbornly high inflation could continue to fuel discontent and potentially affect the electoral campaigns," consulting firm Eurasia Group said in a note.

Mexico started 2017 with a double headache that never completely receded.

On one hand, newly-elected US President Donald Trump's threats to scrap the North American Free Trade Agreement (NAFTA) and make Mexico pay for a border wall caused the value of the peso to plummet.

On the other, a landmark energy reform that removed state subsidies for gasoline and diesel caused fuel prices to soar, triggering riots.

With the weak peso making imports more expensive and the 20-percent gasoline hike echoing through the economy, prices rose sharply -- defying the central bank's efforts to reign them in with five interest rate increases last year, up to 7.25 percent.

Inflation is well above the central bank's target of two to four percent, and is the top challenge facing the bank's new governor, Alejandro Diaz de Leon.

It could also prove troublesome for ruling party presidential candidate Jose Antonio Meade, the former finance minister who presided over the worst of the price increases.

Meade and the Institutional Revolutionary Party (PRI) currently trail radical leftist Andres Manuel Lopez Obrador in opinion polls.

The inflation issue has already dogged him on the campaign trail.

Last week he rejected accusations that he was "the father of the 'gasolinazo,'" the word Mexicans use to refer to the gas-price spike.

Analysts say upward pressure on prices should start to fade early this year, and predict inflation will recede as the gasoline increase drops out of the annual comparisons.

Sunday, October 29, 2017

US Federal Reserve will do nothing in the face of inflation conundrum--analysis

29 October 2017 - 07H55 GMT/UTC/ZULU TIME

by Judith Stein and Biodun Iginla, Financial News reporters, France24, Washington DC

WASHINGTON -

The moribund inflation seen in the world's largest economy over the last year is a "mystery," a "surprise" and a "concern" all at once, in the words of US central bank chief Janet Yellen.

And the dilemma -- why price pressures have not picked up despite nearly a decade's worth of falling unemployment and growth -- will be squarely at the fore when Federal Reserve policymakers gather Tuesday for a two-day meeting in Washington.

If futures markets are to be believed, the Fed will take no action on benchmark interest rates at the meeting, leaving the target range unchanged at between one percent and 1.25 percent.

But it expects to adopt a rate hike in December, its third of the year, to ward off inflation that perpetually seems to be just around the corner.

Hovering over the Fed's deliberations will be President Donald Trump's decision, also due next week, on whether to replace Yellen, whose term as chair expires in February. But on Wednesday all eyes will be looking for clues about what the Fed will do next.

And the camp that favors a rate increase likely got a boost on Friday when official figures showed the US economy beat expectations, growing at a three percent clip in the third quarter despite the pounding taken by the commercial and industrial hubs battered by Hurricanes Irma and Harvey.

But after the Fed's most recent meeting, Yellen acknowledged that growth and job creation had not produced the inflation that long-prized economic models say it should, leaving central bankers in an increasingly uncomfortable quandary.

"It was pretty understandable until this year," Yellen told reporters. "But this year, it's been a surprise."

According to Yellen, she and most of her colleagues on the Federal Open Market Committee, which sets US monetary policy, now "guess" that inflation will begin rising next year and hit their two percent target by 2019.

But an increasingly vocal minority on the committee say this expectation looks less like sound forecasting based on hard numbers and more like an untested article of faith.

The Commerce Department on Monday is due to release a new batch of closely watched inflation figures but whatever the outcome it is unlikely to change the overall picture so far.

- The 'gig' economy and wages -

The "core" measure of the Fed's preferred gauge of inflation, which strips out volatile food and energy prices from the Personal Consumption Expenditures price index, has been below the central bank's two percent target for more than five years.

As of Friday it was at a rock-bottom 1.3 percent. Meanwhile, the core Consumer Price Index fell below the same target earlier this year to 1.7 percent and has not budged for five months in a row.

The Fed's "Beige Book" survey said this month that wage pressures were scant despite a "widespread" labor shortage.

Joseph Gagnon, a former Fed official now at the Peterson Institute for International Economics, told us at France24 that the circumstances did not point to a rate hike.

"I do wonder what they're thinking," he said.

"If they rely too much on their models and not enough on their data, it could be a mistake."

The Fed has dismissed this year's low inflation as the result of one-off factors like falling drug prices and mobile telephone costs. But advanced economies across the world are in a similar state, suggesting the Fed's "transitory" factors may be beside the point.

The so-called "doves," who favor waiting to raise rates, say inflation is low in large part because jobs markets are not as healthy as they seem.

Research from the International Monetary Fund published recently shows part-time and temporary employment, otherwise known as the "gig economy," accounted for much of the recovery in job creation since the 2008 Great Recession -- holding down wages and inflation as a result.

Traditional measures of "slack," or the level of unused labor on the market, may not accurately measure the amount of under-employment -- allowing unemployment data to fall while inflation remains tame.

"The low wage inflation to us is just the proof in the pudding that there's a lot of labor market slack," said Josh Bivens, research director at the left-leaning Economic Policy Institute.

"To me, you just have to believe the data. We're not there."