U.S. Inflation: A Step Slower

U.S. Inflation: A Step Slower

U.S. inflation took a brief breather in August; the ECB added some encouraging words to its unchanged stance; Russia's central bank made a normal, if unexpected, rate hike to stave off future inflation.

"We are under no pressure to make a deal with China, they are under pressure to make a deal with us"
President Donald Trump

U.S. Inflation: A step slower August saw producer prices(ex-food and -energy) fall (0.1%) for the month, the first such drop in 18 months. Most notable was the reduction of (0.1%) in the cost of services, most of which was due to falling margins for machinery and equipment wholesaling. Goods prices held steady, with a (0.6%) fall in food costs offset by a 0.4% increase in energy. In general, the report suggested that overall inflation may be easing at the producer level.

In contrast, consumer prices rose, though slightly less rapidly than before; for the 12 months ended Aug 30, the headline figure was 2.7%, below July’s 2.9%; ex-food and -energy, the figures were 2.2% vs. July’s 2.4%, also slightly lower than expected. Goods-sector deflation was in evidence, possibly due to the rising U.S. dollar.

These price rises are higher than the Fed’ preferred inflation measure, the core PCE deflator, which was at 2% for July; August’s figure will be released on September 28th. But it’s too soon to call these figures supportive of a more dovish overall stance by the Fed for rate hikes after the widely-expected September 26 rise.
 

Europe: On course The European Central Bank (ECB) held its first post-summer meeting on September 13, making no changes to its existing rate settings; to its schedule for trimming and then ending its bond-buying program; and to its plans to reinvest the bonds it does hold as they mature. There was no change in the forecast that inflation would remain below the ECB’s 2.0% target through 2020 or beyond.

But the tone of ECB President Mario Draghi’s comments was slightly more upbeat than in the past – including that the uncertainty of the ECB’s outlook is “receding”, and that the eurozone economy had been experiencing “growth above potential for some time”. That assessment was framed as positive, since it implied that the economy would at some point burn through its slack in employment and prices (its “output gap”) and begin generating both increased employment and strength in prices.  The relatively positive tone lifted the euro vs the U.S. dollar from about $1.161 to as high as $1.172 before pulling back somewhat to about $1.166.1
 

Russian rates: Pre-emptive strike For the first time since 2014, Russia’s central bank raised its base rate on September 13, bringing it to 7.50%, a 25 basis point rise. The move was small but unexpected, brought about as a measured response to a rise in inflation to a year-on-year rate of 3.1% as of the end of August.

Compare that move to Turkey’s long-overdue 625 bps hike on the same day, bringing the rate to 24% in the face of inflation jumping 18% year-over-year for Q3; producer prices rose over 32% during the same period, making inflation-adjusted interest rates still negative for the producer sector of the economy – hardly a recipe for stopping inflation in its tracks.

 


1 All prices Source: Bloomberg, September 14, 7:00 AM – 10:30 AM ET, unless otherwise indicated

[1] All prices Source: Bloomberg, September 14, 7:00 AM – 10:30 AM ET, unless otherwise indicated

 

[1] All prices Source: Bloomberg, September 14, 7:00 AM – 10:30 AM ET, unless otherwise indicated

 
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