Date: December 4, 2018
Here Are Some Signs U.S. Inflation Is Drifting Below Fed’s Goal
Just when you thought U.S. inflation was stabilizing around the Federal Reserve’s 2 percent goal, it’s getting pulled back down again. In contrast to the resounding success on their maximum-employment target, policy makers may have to wait a while before declaring victory on inflation as recent reports show price pressures are cooling off instead. The slowdown — covering the Fed’s preferred price gauge, surveys of consumers and a poll of manufacturers — is hard to ignore at a time central bank officials emphasize that their decisions will be increasingly data dependent. The path of 2019 interest-rate hikes looks less certain beyond a widely-expected move in December, which would be the fourth this year. Markets anticipate a slower tightening pace than the Fed has flagged. On Monday, a section of the U.S. Treasury yield curve inverted for the first time in more than a decade, while five-year inflation expectations were near the lowest in more than a year. The following charts highlight what’s happening with inflation. While the Labor Department’s report on October consumer prices was mixed, the latest results for the Fed’s own preferred price measure, which is tied to consumer spending, came in weak. Even though the so-called PCE gauge met the central bank’s 2 percent goal, it failed to accelerate as economists had forecast, and has softened since mid-2018. Excluding volatile food and energy costs, PCE inflation cooled to the slowest since February, bringing the three-month annualized rate to 1.1 percent. The Fed monitors the core measure for a better read on underlying price trends, but it has topped 2 percent just once this year on an unrounded basis. Watching it is even more important at a time oil prices have plunged and show little sign of rebounding, a factor that weighed on a measure of prices paid for materials by manufacturers: that index fell by the most in six years in November, Institute for Supply Management data showed Monday.
Euro Area Reaches Deal on Joint Budget Plan and New Bond Rules
Less than a decade after the financial crisis nearly tore the euro area apart, a long-anticipated push to shore up the single currency finally started taking shape at a meeting of the bloc’s finance ministers, though it will likely underwhelm those calling for tighter integration. The compromise struck around 8 a.m. Tuesday after almost 16 hours of talks in Brussels paves the way for advances in areas from debt sustainability to a possible euro-zone budget. But it’s a long way short of the sweeping vision of an integrated and assertive Europe set out by French President Emmanuel Macron last year. Among the key steps the ministers agreed on during the contentious talks are a stronger role for the euro-area bailout fund including stronger precautionary tools for countries in need of assistance. Crucially, they also agreed that it would act as it as a backstop for the bloc’s fund for winding down failing banks. The ministers also set out on a more detailed outline of how to handle debt sustainability issues and subsequent restructurings for countries in need of emergency loans. The most controversial discussion was on “possible budgetary instruments” for the euro area, a topic which pitted staunch advocate France against hawkish countries led by the Netherlands, amid persisting disagreements over whether such a tool is needed in the euro-area’s crisis-fighting apparatus. After hours of fighting over a few words, ministers agreed that, so long as their leaders sign off, “work could proceed on the design, implementation and timing of such an instrument for convergence and competitiveness.” That’s unlikely to please the French, who had been pushing for a tool that would serve to stabilize the bloc’s economies in a downturn.
India’s Inflation Data Questioned by Central Bank Policy Maker
India’s inflation data is once again under scrutiny after a member of the central bank’s monetary policy panel raised questions about its efficacy. There was an urgent need to modernize the way changes to prices are being calculated by the government as well as the way inflation expectations are being surveyed by the Reserve Bank of India, Ravindra Dholakia, a dovish member of the panel, wrote recently in the Economic and Political Weekly. “If a country accepts inflation-targeting framework, it has to be extremely serious and cautious about the correct and realistic measurement of its inflation rate,” Dholakia said. “Inflation-targeting framework without proper measurement of inflation rate can involve very high real costs and make the policy counterproductive.” Dholakia said the current practice of measuring the inflation rate from a fixed base weight index is “outdated” and likely to overstate inflation substantially compared to the chain-weighted index used in developed countries. The latter refers to the method of continuously changing the weight of goods and services to match prevailing trends as opposed to keeping it fixed. The comments come at a time when inflation continues to undershoot the RBI’s forecasts. Inflation averaged 4.3 percent in the six months of the fiscal year through September, below the RBI’s range of 4.7 percent to 5.1 percent from its April monetary policy statement. At 3.31 percent in October, inflation is already underneath the 3.9 percent lower end of the range for the second half. The RBI’s target is to keep inflation at 4 percent over the medium term. Part of the reason for the inflation miss this year is volatile oil and benign food prices. The RBI twice raised its inflation forecasts for the fiscal second-half: in June and August, when it raised interest rates amid elevated crude prices and a currency slump. It then lowered the projection in October as food prices unusually softened, which enabled policy makers to keep rates unchanged.