June 13, 2018
U.S. Inflation Accelerates to Six-Year High, Eroding Wages
U.S. inflation accelerated in May to the fastest pace in more than six years, reinforcing the Federal Reserve’s outlook for gradual interest-rate hikes while eroding wage gains that remain relatively tepid despite an 18-year low in unemployment. The consumer price index rose 0.2 percent from the previous month and 2.8 percent from a year earlier, matching estimates, a Labor Department report showed Tuesday. The annual gain was the biggest since February 2012 and follows a 2.5 percent increase in April. Excluding food and energy, the core gauge was up 0.2 percent from the prior month and 2.2 percent from May 2017, also matching the median estimates of economists. The pickup in headline inflation partly reflects gains in fuel prices, though the annual gain in the core measure — seen by officials as a better gauge of underlying inflation trends — was the most since February 2017. While the Fed is widely projected to raise borrowing costs this week for the sixth time in 18 months, the path of inflation will figure into policy makers’ thinking on the pace of increases for the second half and in 2019. The data “provide further evidence that inflation is moving towards the Fed’s objective,” and the central bank will continue on its gradual rate-hike path, said Kevin Cummins, an economist at NatWest Markets. The pay figures are “a reminder that you don’t need to necessarily get more aggressive in your approach because wages haven’t accelerated as much as they have in the past,” he said. The Fed’s preferred gauge of inflation — a separate consumption-based figure from the Commerce Department — came in at the central bank’s 2 percent goal during March and April, and the figure tends to run slightly below the Labor Department’s CPI. At the same time, several Fed officials have indicated that a modest overshoot of the inflation goal wouldn’t necessarily warrant faster interest-rate hikes, after years of below-target price gains. Commerce Department figures released May 31 showed the Fed’s preferred gauge of core prices was up 1.8 percent in April from a year earlier.
The $1.4 Trillion U.S. ‘Surplus’ That Trump’s Not Talking About
The U.S. has a surplus of $20 billion with China and $1.4 trillion with the rest of the world. That’s not a normal trade balance, of course, where the U.S. registered an annual deficit of more than $330 billion with China and about $550 billion with the world last year, but an “aggregate sales surplus” which measures both direct trade and the sales of multinational companies, according to research by Deutsche Bank AG. Just looking at the goods and services trade deficit is misleading and doesn’t capture the true size of U.S. business interests, according to Deutsche Bank economists. While trade and corporate data aren’t usually combined, if you add up all trade data, sales by U.S. companies in foreign countries and foreign firms in the U.S., “U.S. companies have sold more to the rest of the world than other countries have sold to the U.S. in the past ten years,” writes chief China economist Zhang Zhiwei in the report. President Donald Trump’s determination to rein in his nation’s trade deficit has put him at odds with the developed world, a stance that undermined an acrimonious G-7 summit in Canada at the weekend. China and the U.S. are meanwhile locked in negotiations to stave off a trade war, with Trump threatening to slap tariffs on at least $50 billion in Chinese imports after June 15. For China, the image of a massive trade deficit with the U.S. “is at odds with the fact that Chinese consumers own more iPhones and buy more General Motors cars than U.S. consumers,” wrote Zhang in the report. “These cars and phones are sold to China not through U.S. exports but through Chinese subsidiaries of multinational enterprises.”
Euro Area Dealt Spate of Weak Economic Cards as ECB Eyes Exit
A slump in euro-area industrial production joined a series of underwhelming economic data on the eve of a European Central Bank meeting that may set the course for future monetary stimulus. Output dropped 0.9 percent in April, pulled down by a plunge in energy, Eurostat said on Wednesday. Production fell in the region’s four biggest economies and the overall decline exceeded the 0.7 percent forecast in a Bloomberg survey. Disappointing news have been plentiful in recent weeks. A spate of numbers have defied expectations, suggesting the 19-nation economy isn’t likely to match last year’s rapid pace of expansion and might even slow down considerably. On top of that, there are uncertainties ranging from Italian politics to trade tensions that intensified during a meeting of Group of Seven leaders at the weekend. More prominent global risks already caught the Governing Council’s attention at its last policy meeting in April and updated forecasts due on Thursday will show how they affect growth and inflation in the months and years ahead. In March, the ECB predicted a 2.4 percent expansion for 2018, matching last year’s rate, with inflation averaging 1.4 percent. So far, officials have underlined the robust and broad-based economic upswing and reiterated their commitment to start a discussion this week on how to scale back monetary support, though there’s no guarantee a decision will be made. In spite of the latest slowdown, economists predict asset purchases will end this year.
Japan’s First-Quarter Economic Contraction Worse Than Forecast
Japan’s economy has moved past a rough stretch that ended a two-year run of growth, with forecasts pointing to renewed expansion as global demand regains traction. Gross domestic product shrank 0.6 percent on an annualized basis in the first quarter, according to revised data released on Friday, as a weaker reading of private consumption offset a stronger one for capital investment. That missed the median forecast of economists. The downturn, partly caused by soft global demand, has probably passed, said Tomo Kinoshita, chief market economist for Nomura Securities. “Looking forward, we are more optimistic about the U.S. and EU, and that should help Japan’s exports regain momentum, and that should drive the overall economy,” Kinoshita told Bloomberg Television. Private consumption remains soft — and an obstacle to the Bank of Japan’s goal of generating 2 percent inflation. It fell 0.1 percent during the first quarter, the revised data showed on Friday, but that was the result of an upward revision to the fourth-quarter figure to growth of 0.3 percent. Export growth, capital investment and the tightest labor market in decades have yet to turn into the kind of robust wage gains and consumer spending that could fuel 2 percent inflation. “In principle, Japan is an export-driven economy, but domestic demand isn’t following through,” said Hiroaki Muto, chief economist at Tokai Tokyo Research Center. “The problem is that disposable income isn’t rising.” Capital investment has been on the rise for more than a year, but at a slow pace. The first-quarter result was revised higher to an increase of 0.3 percent, up from a preliminary reading of -0.1 percent. While economic growth is poised to resume, it is expected to be slower than the 1.7 percent achieved in 2017. And the reliance on external demand will leave Japan vulnerable at a time of escalating trade battles.