Date: August 10, 2018
U.S. Consumer Prices Rise; Core Posts Biggest Gain Since 2008
U.S. consumer prices rose in July, with a gauge excluding food and fuel costs posting the biggest annual gain since 2008, underpinning expectations that the Federal Reserve will raise interest rates next month. The consumer-price index rose 0.2 percent from June after a 0.1 percent month-on-month gain the prior month, a Labor Department report showed Friday. That matched the Bloomberg survey median. Excluding food and energy, the core gauge was also up 0.2 percent, the same as projected. The core measure on a year-over- year basis advanced 2.4 percent, the biggest jump in that measure since September 2008. The results indicate steady consumer demand will sustain inflation, at a time tariffs and counter-levies by the U.S. and nations including China also threaten to lift costs on a range of goods. Sustained progress toward the Fed’s goal — based on its preferred gauge of inflation — keeps the central bank on track for one or two more rate hikes this year. The overall CPI gauge rose 2.9 percent in the 12 months through July, matching the survey median, the report showed. Core CPI was projected to advance 2.3 percent on an annual basis. About 60 percent of the increase in the overall index came from a jump in shelter costs. Some items that posted big declines in June reversed course in July. Among them were hotel and motel rates, which rose 0.4 percent after a record decline of 4.1 percent in June. Airfares jumped 2.7 percent, the most since July 2013, following a 0.9 percent drop in June. Apparel decreased again, dropping 0.3 percent after falling 0.9 percent the prior month. The core CPI reading brought the three-month annualized gain to 2.3 percent, after rising 1.7 percent in June. The Fed’s preferred gauge of inflation — a consumption-based figure that tends to run slightly below the Labor Department’s CPI — has been at or above the central bank’s 2 percent goal since March, though the related core index was still shy of the target. Fed officials see core inflation as a more reliable gauge of underlying price pressures.
Mixed U.K. Growth Data Highlight Need For BOE Caution on Rates
The U.K.’s second quarter growth figures underlined why Bank of England officials felt compelled to act this month, but also highlighted the need for their cautious approach in coming months. Data Friday showed the economy expanded 0.4 percent in the three months through June, double the rate of the snow-blighted previous quarter. GDP is now expanding at an annualized rate of 1.5 percent, the level policy makers say is the U.K.’s speed limit. That supports their argument that the first-quarter slowdown was a blip and backs up their decision to raise interest rates last week. Scratching below the surface, however, gives a more mixed view of the economy. Newly introduced monthly figures showed a bigger-than-expected slowdown to 0.1 percent in June, with the dominant services industry failing to grow at all. It suggests the U.K. is already losing some of its new-found momentum. Throw in the complication of Brexit, and the case for caution becomes even stronger. “The overall picture is of an economy performing moderately better than it did three months ago, but one struggling for any real momentum,” said Mike Jakeman, senior economist at PwC. “Positive factors are likely to be counterbalanced by a slowing global economy, a small increasing in borrowing costs and further Brexit-related uncertainty. In short: tepid growth is likely for the next 18 months at least.” Investors already saw the BOE refraining from further rate increases until after Britain leaves the European Union in March, and Friday’s data reinforced expectations that officials will take a gradualist approach. The odds of a hike in May dropped to 45 percent, from 55 percent yesterday, and a full quarter-point increase is now not full priced into until early 2020.
China Has a Stealth $410 Billion Stash to Boost the Economy
Stashed away around China is a pile of cash larger than the annual economic output of Norway. Governments at all levels across the nation have a total of 2.8 trillion yuan ($410 billion) saved, according to researchers at Industrial Bank Co., and that money could be used to boost economic growth in the event of further escalation of the trade war. The money is from unspent revenues, profits from land sales, levies or profit from state firms, expected bond revenues and other sources. The hoard exceeds the targeted national budget deficit of 2.38 trillion yuan for this year. While those funds are unlikely to be spent all at once, the sheer size of it shows that there is a cushion available to shield the economy from shocks due to the trade war with the U.S In addition, extra funding could come from public-private partnerships or local governments, according to the note.
China’s Regional Growth Divergence Adds to Debt Policy Dilemma
China is growing at a very steady pace — fluctuating between 6.7 percent and 6.9 percent for the past three years. But under the hood, there’s a wide divergence among its 31 regions in the first half of this year — from a 2.5 percent expansion for northeastern Jilin to a 10 percent boom for southwestern Guizhou. Such divergence makes it hard to crack down on debt across the nation with a one-size-fits-all policy, as the stimulus that may be needed in Inner Mongolia might cause too much lending in more prosperous regions such as Shanghai. The government borrowing crackdown is having an effect nationwide — investment decelerated in the first half of this year to the slowest pace in two decades, as local governments were forced to curb debt. Much of the red across northern China shown on the map is due to lackluster private economies and dependence on heavy industries in those provinces, according to Bloomberg economist Qian Wan in Beijing. “Regions dependent on state-led infrastructure spending were hurt more than others by the deleveraging campaign,” said Robin Xing, chief China economist at Morgan Stanley in Hong Kong. “So the politburo is adjusting the pace of the debt curbs, and we’ll probably see the expansion of total social financing stabilize in the second half.” There’s also the hangover from data manipulation in some provinces, with the cleanup of the data in Tianjin, Jilin and Inner Mongolia hurting their headline growth numbers, Wan said.