Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

U.S. Inflation Prospects

Economics / Inflation May 26, 2010 - 02:00 AM GMT

By: Hans_Wagner

Economics

Best Financial Markets Analysis ArticleInflation in the United States is extremely low with the GDP deflator coming in at 0.4 percent and the Core Consumer Price Index measuring 1.1 percent year over year. For April 2010, the last month reported, the CPI declined 0.1 percent.


The Federal Open Market Committee (FOMC) is keeping short-term fed funds rates in the 0.00 to 0.25 percent range. When coupled with the huge economic stimulus from the Fed and the government, many analysts expect inflation to raise its ugly head in the near future. Let’s examine the prospects for inflation and what is keeping inflation rates low for the foreseeable future.

Consumer Prices

The Consumer Price Index (CPI) is comprised of three important categories, wages, productivity and the price of commodities. Compensation is by far the largest component. Offsetting wage increases are the productivity improvements companies achieve in the production of a good or service. Improvements in productivity lower the cost of the good or service, requiring less labor and materials. Commodity prices are the third and most volatile component of the CPI.

According to the Bureau of Labor Statistics, total compensation costs for civilian workers rose 1.7 percent for the year ended March 2010. When you factor in productivity, unit labor costs (the labor cost per unit of output) have fallen 3.7 percent over the past year.

Global competition for labor has kept a lid on rising labor costs and it will continue to do so for years to come. Competition for jobs remains fierce with five unemployed workers competing for every job opening.

Elance.com, a web site for freelancers has grown to more than 700,000 members as people look for work in new and different ways. You can bid on a job, competing with talent from anywhere in the world, often for less than the minimum wage. Finding work that pays well remains a difficult challenge.

High unemployment, now at 9.9 percent and underemployment at 17.0 percent, increases the competition for jobs, helping to keep the level of inflation low.

Commodity prices are more volatility moving up and down regularly. With the recent fall in commodity prices and the rise in the U.S. dollar inflation from rising commodities is not likely.

With unit labor costs at relative low levels and commodities at recent lows, inflation from rising consumer prices is a long ways off.

Monitor changes in labor costs per unit of output to determine when inflation might pick up. Should commodity prices start to trend up expect some pick up in inflation particularly for sectors that are heavily commodity dependent.

Monetization of Sovereign Debt

Governments around the world are using substantial amounts of debt to help their economies recover and to fund social programs. Central banks are supporting this new debt with easy monetary policies. Many fear this will cause the money supply to expand at unprecedented rates. When the money supply expands faster than the GDP of the country, it leads to inflation.

Banks create new money when they make a loan. As long as lending grows at the pace of the economy, the growth of the money supply is not inflationary. The Federal Reserve can encourage or discourage lending through their monetary policies, primarily through short-term fed funds rates.

The quantitative easing by the Federal Reserve to avoid a depression has brought the government into the direct creation of money. In the U.S. the Federal Reserve buys government and mortgage bonds. When they do, it creates a bank loan by the government. This is new money just like when a bank makes a loan. The Fed carried out this new strategy to try to prevent a depression.

This massive creation of money by the Fed is what concerns many analysts, who fear the U.S. is on the verge of a new inflationary spiral.

The same concern holds for Europe as the European Union and the Central Bank are following the Federal Reserve’s example.

So far, the rapid growth in the money supply that many analysts expect has not happened, as bank loan growth remains weak.

M1 has grown 6.8 percent over the last 12-months, 3.1 percent in the last 6 months and 5 percent for the latest 3-month period. With inflation running at 2 percent and GDP growth at 3 percent, a 5 percent growth in M1 is just fine (3 + 2 = 5)

M2 a broader measure of the money supply grew 1.6 percent in the last 12 months, a -0.2 percent for the latest 6-month period and -0.3 percent for the last 3 months. The weakness in M2 reflects the outright decline in commercial and industrial, known as C&I loans, at all reporting commercial banks in the U.S.

According to the Federal Reserve data, C&I loans fell13.4 percent annually in the first quarter of 2009. The second quarter of 2009 experienced a decline of 16.5 percent followed by 26.2 percent in the third quarter and 23.8% in the fourth quarter of 2009. the trend continues as C&I loans fell another 20.6 percent annually in the first quarter of 2010. No wonder the money supply is declining despite all the money the Fed is injecting into the economy.

Europe is following the example set by the U.S., injecting almost $1 trillion in loan guarantees and grants from the European Union countries and the ECB is buying bonds to add liquidity to the markets. They are following the example set by the Federal Reserve. To see if this program will cause inflation monitor the lending by the European banks, especially commercial and industrial loans. If the European C&I loans keep falling, it is likely the money supply will not expand as some predict.

The question going forward for everyone is can the central banks reverse the quantitative easing once bank lending picks up. As a first step in their reversing process, the Federal Reserve stopped buying mortgages at the end of March 2010. In the months and years ahead, we need to watch carefully if the Fed can turn back their quantitative easing without causing the money supply to take off. Monitor changes in bank lending, especially the C&I loans to get an idea of when the Fed will tighten further.

With the prospect for inflation rather muted for now, the question becomes how  will governments pay for their huge deficits. Politically difficult spending cuts and higher taxes are in the cards. If governments are unable to address their deficits, their people face series economic consequences including deflation, the topic for next week’s Point of Interest.

The Bottom Line

To see if inflation becomes a problem monitor the changes in C&I lending, as well as the next moves by the Fed on reversing their easy money policy. Changes in the overnight fed funds rate is only one of their tools. The St. Louis Federal Reserve with their FRED database provides many useful charts and tables.

By Hans Wagner
tradingonlinemarkets.com

My Name is Hans Wagner and as a long time investor, I was fortunate to retire at 55. I believe you can employ simple investment principles to find and evaluate companies before committing one's hard earned money. Recently, after my children and their friends graduated from college, I found my self helping them to learn about the stock market and investing in stocks. As a result I created a website that provides a growing set of information on many investing topics along with sample portfolios that consistently beat the market at http://www.tradingonlinemarkets.com/

Copyright © 2010 Hans Wagner

If you wish to learn more on evaluating the market cycles, I suggest you read:

Ahead of the Curve: A Commonsense Guide to Forecasting Business and Market Cycles by Joe Ellis is an excellent book on how to predict macro moves of the market.

Unexpected Returns: Understanding Secular Stock Market Cycles by Ed Easterling.  One of the best, easy-to-read, study of stock market cycles of which I know.

The Disciplined Trader: Developing Winning Attitudes by Mark Douglas.  Controlling ones attitudes and emotions are crucial if you are to be a successful trader.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules