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Inflation Watch

U.S. Producer prices see largest increase in April in over a year

By Inflation Watch

We are keeping a close eye on indicators that might point to a rise in inflationary pressures. Is the outperformance of Real Assets YTD indicating this?

U.S. producer prices saw their largest increase in over a year last month, hinting at some inflation pressures at the wholesale level.

The Labor Department said its seasonally adjusted producer price index (PPI) for final demand advanced 0.6% in April, marking the biggest rise since September 2012. It was the second consecutive month that metric advanced. In March, the index increased 0.5%.

The Department of Labor’s PPI measures a change in selling prices received by domestic producers. The price index for foods reported the largest increase last month, while energy and transportation and warehousing prices also rose.


India Inflation Watch

By Inflation Watch

Consumer Inflation rose in April to 8.59%. The elevated inflation levels could pressure on the central bank to keep interest rates at current levels despite pressure from Indian industry to bring them down.

The RBI wants to see consumer inflation ease to 8% by January 2015 and 6% in the following year.

The country’s wholesale price index likely rose 5.80% in April from a year earlier, according to a poll of 12 economists by The Wall Street Journal. The index increased 5.70% in March, which was its fastest rise in three months. The government is scheduled to announce the rate on Thursday.

Food prices rose during the month as vegetable and fruit supplies from a bumper crop earlier in the year dried up. Lower fuel prices helped offset some of the higher food prices, economists said. Indian fuel retailers lowered gasoline prices twice in April.

For the rest of this year economists and weather watchers are worried that below-normal rains during the June through September monsoon season could trigger inflation again.

(Source: Wall Street Journal)

China’s Inflation Slows More Than Estimated

By Inflation Watch

Consumer inflation in China moderated to an 18-month low and the decline in factory-gate prices persisted, giving the government more scope to loosen policies if a growth slowdown deepens.

The consumer price index rose 1.8 percent from a year earlier in April, the National Bureau of Statistics said today in Beijing. That compares with the median estimate of 2.1 percent in a Bloomberg News survey and a 2.4 percent gain in March. The producer-price index fell 2 percent, the 26th straight decline, after a 2.3 percent drop the previous month.

Today’s data add to signs that domestic demand remains muted, with falling commodity prices exacerbating overcapacity in industries including steel and cement. The lack of inflationary pressure will allow the People’s Bank of China to relax monetary policy to support the economy if Premier Li Keqiang’s full-year goal of about 7.5 percent is threatened.

(Source: Bloomberg)

US Dollar Index-DXY

By Inflation Watch

US Dollar Index

Is the US dollar headed for a fall despite positive economic data recently?

Stronger than expected non-farm payrolls and a surging composite PMI data were not enough to send real interest rates higher. Treasury yields have fallen due to Ukrainian tensions and weaker than expected PMI data from China. The net effect of these developments has been a weaker US dollar, which looks to be in danger of falling to its lowest levels in two years on a trade-weighted basis.

US Core Personal Consumption Expenditure Index Year over Year

By Inflation Watch

US PCE Core Year over Year


Yesterday we noted stagnant price growth in Europe, but the environment in the US is hardly inflationary. The Federal Reserve’s favorite inflation metric, the core Personal Consumption Expenditure index (PCE), grew 1.2% Y/Y in March, in-line with expectations and slightly higher than February. Janet Yellen and company really need this index to turn higher as they continue to withdraw stimulus from the economy. The FOMC sounded optimistic about growth after yesterday’s meeting, where it cut monthly asset purchases to $45bn. If PCE indicators were to fall from current levels, it would be interesting to see whether the Fed would reverse course by increasing asset purchases or opt for a new strategy.

(Source: GBI)

Eurozone CPI as of April-2014

By Inflation Watch

Eurozone CPI


Is the Eurozone in a deflationary grip? Will the ECB policies be able to pull it out?

April CPI growth in the Eurozone was up from March but remains well below the ECB’s target at 0.7% Y/Y, and below expectations of 0.8% Y/Y. Analysts believe that this latest data point is not conclusive enough for the ECB to start a QE-like asset-purchase program, but stagnant prices will keep real interest rates high and will continue to support the Euro relative to other currencies.

(Source: GBI, Bloomberg)

Yellen Concerned Fed Model Fails to Predict Price Moves

By Inflation Watch

Federal Reserve Chair Janet Yellen is concerned that the standard models central banks use to forecast inflation may be broken.

Behind her disquiet: the failure of the models to foresee the path of prices in the U.S. during the last recession and its aftermath and in Japan during its deflationary period from 1998 to 2012. U.S. inflation has been higher than the simulations suggested, while Japanese price declines proved more persistent.

Yellen alluded to her concerns in a speech last week, saying the Fed has to “watch carefully” to see if inflation picks up as the central bank projects — and hopes — during the next few years.

Standard computer models rest on two main pillars in trying to forecast longer-run price pressures: the amount of slack in the economy, usually measured by unemployment, and inflation expectations.

The higher the joblessness rate is above its so-called natural rate, the harder it is for employees to win pay increases and for inflation to accelerate. Yellen pegs that natural rate — at which price increases neither speed up nor slow down — at 5.2 percent to 5.6 percent. Unemployment in March was 6.7 percent.

Most Fed policy makers see inflation climbing to 1.5 percent to 2 percent by the end of next year and 1.7 percent to 2 percent at the end of 2016, according to projections released on March 19.

(Source: Bloomberg)

Pump Prices Help to Drive Inflation Outlook

By Inflation Watch

Pump Prices Help To Drive Inflation Outlook


While we watch many indicators that might point to a future rise in inflation, the above chart depicts how consumers correlate near term inflation expectations with prices paid at the pump.

According to Friday’s consumer sentiment survey put out by Thomson-Reuters and the University of Michigan, consumers think inflation will be 3.2% a year from now, little changed from expectation readings so far this year. (Consumers almost always think inflation is running higher than the government’s official measures. The consumer price index, for instance, shows prices are up just 1.5% in the past year.)

Changes in gasoline prices tend to color how consumers view inflation. That’s not a surprise since gas prices are very visible and drivers tend to fill up frequently. Prices at the pump have been rising lately. Add in the price jump for some grocery items—most notably beef and pork—and it would not be surprising if inflation expectations edge up in coming months.

(Source: Wall Street Journal)