Financial Times Editorial - Slowing US growth but rising inflation
Financial Times Editorial - Slowing US growth but rising inflation
Published: June 7 2006 03:00 | Last updated: June 7 2006 03:00
Copyright by The Financial Times
There can be little dispute with Ben Bernanke's observation on Monday that the US economy is "entering a period of transition". Understandably, though, the markets alighted on the least ambivalent portion of the Fed chairman's remarks that inflation was "at, or above, the upper end" of what most economists view as consistent with price stability. As a result, the futures market is now forecasting another quarter point rise at the Fed's next meeting in late June.
But things are not necessarily that simple. Recent US data pose a particular challenge because they are pulling in opposite directions. As Mr Bernanke observed, core inflation - excluding food and energy - has risen to 3.2 per cent in the past three months, up from a 2.8 per cent six-month average. Some of this can be attributed to the feed through of higher oil and other commodity prices into retail costs. But it could also signify inflationary pressures resulting from a rise in US capacity utilisation.
Against this, there is clear evidence that overall US economic growth is starting to slow as the Fed has long anticipated. Last Friday's non-farm employment numbers looked tepid, with a rise of just 75,000 compared to an average of 125,000 in the past few months. In addition, there are further signs of a weakening in the housing market, with a slowdown in sales and persuasive evidence - in spite of the volatility in US residential data - of a tapering off in house price inflation. There are corresponding signs of a parallel slowdown in consumer buoyancy, which has been largely sustained by the housing market boom.
In previous remarks, Mr Bernanke has hinted he would be prepared to tolerate a short-term rise in inflation as long as it did not affect the Fed's medium-term forecast. Most took this to mean the Fed was readying the markets for a pause in its two-year tightening cycle at its open market meeting in June. But Mr Bernanke has now twice prompted a reappraisal of the market's benign interpretation of what he meant by a pause, the first time in unscripted comments to a broadcast journalist in April, the second on Monday.
In addition, the Fed chairman faces the problem of rising inflation expectations. The spread between inflation-linked Tips and ten-year Treasury bonds has widened by about 30 basis points in the past three months. This echoes rising inflation expectations from consumer surveys. Overlooking what may turn out to be a short-term blip in core inflation is one thing. It is quite another to ignore rising expectations. As Mr Bernanke argued, the best way to prevent higher energy prices from creating higher inflation is by "anchoring the public's long-term inflation expectations". On balance then, the market's interpretation of Mr Bernanke's remarks seems reasonable. The Fed's benchmark rate looks likely to rise at least one more time.
Published: June 7 2006 03:00 | Last updated: June 7 2006 03:00
Copyright by The Financial Times
There can be little dispute with Ben Bernanke's observation on Monday that the US economy is "entering a period of transition". Understandably, though, the markets alighted on the least ambivalent portion of the Fed chairman's remarks that inflation was "at, or above, the upper end" of what most economists view as consistent with price stability. As a result, the futures market is now forecasting another quarter point rise at the Fed's next meeting in late June.
But things are not necessarily that simple. Recent US data pose a particular challenge because they are pulling in opposite directions. As Mr Bernanke observed, core inflation - excluding food and energy - has risen to 3.2 per cent in the past three months, up from a 2.8 per cent six-month average. Some of this can be attributed to the feed through of higher oil and other commodity prices into retail costs. But it could also signify inflationary pressures resulting from a rise in US capacity utilisation.
Against this, there is clear evidence that overall US economic growth is starting to slow as the Fed has long anticipated. Last Friday's non-farm employment numbers looked tepid, with a rise of just 75,000 compared to an average of 125,000 in the past few months. In addition, there are further signs of a weakening in the housing market, with a slowdown in sales and persuasive evidence - in spite of the volatility in US residential data - of a tapering off in house price inflation. There are corresponding signs of a parallel slowdown in consumer buoyancy, which has been largely sustained by the housing market boom.
In previous remarks, Mr Bernanke has hinted he would be prepared to tolerate a short-term rise in inflation as long as it did not affect the Fed's medium-term forecast. Most took this to mean the Fed was readying the markets for a pause in its two-year tightening cycle at its open market meeting in June. But Mr Bernanke has now twice prompted a reappraisal of the market's benign interpretation of what he meant by a pause, the first time in unscripted comments to a broadcast journalist in April, the second on Monday.
In addition, the Fed chairman faces the problem of rising inflation expectations. The spread between inflation-linked Tips and ten-year Treasury bonds has widened by about 30 basis points in the past three months. This echoes rising inflation expectations from consumer surveys. Overlooking what may turn out to be a short-term blip in core inflation is one thing. It is quite another to ignore rising expectations. As Mr Bernanke argued, the best way to prevent higher energy prices from creating higher inflation is by "anchoring the public's long-term inflation expectations". On balance then, the market's interpretation of Mr Bernanke's remarks seems reasonable. The Fed's benchmark rate looks likely to rise at least one more time.
posted by Carlos T Mock at 8:50 PM
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