The New York Times
16 May 2014
The Federal Reserve finally seems to be getting what it wants.
Two indicators of economic health that the Fed and its chairwoman, Janet L. Yellen, have identified as keys to a stronger recovery — modestly higher inflation and a more robust job market — finally seem to be moving in the right direction, according to new data released by the government on Thursday.
In particular, economists said, a rise in the Consumer Price Index in April, along with several other reports this week, suggest a broader economic firming is underway after a weak, weather-plagued start to 2014.
Besides the increase in consumer prices reported on Thursday, data Wednesday on producer prices showed a rise of 0.6 percent last month, the largest increase since September 2012 and an indication that demand for a number of basic goods is growing faster than economists expected.
At the same time, a survey of small-business optimism on Tuesday showed sentiment at its best level since before the recession began in December 2007.
“It’s not just the C.P.I.,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. “We’ve had loads more data showing the same thing, and it’s good news because the fear at this time last year was excessively low inflation or even deflation.”
These nascent signs of a rebound in the United States stand in stark contrast to the economic landscape in Europe, where many countries are struggling to grow at all, and stagnation, deflation and high unemployment remain menaces.
Although preventing higher inflation has long been the traditional concern for central bankers, and many remember it as a serious problem from the 1970s, the Fed has been more worried in recent years about the risk of stagnant prices, which reflect an economy struggling to recover from the financial crisis and recession.
As recently as last month, in a speech in New York, Ms. Yellen warned that the danger of too little inflation still outweighed the risks posed by too much. But even as the Fed’s preferred inflation gauge remains contained, the new data from the Labor Department Thursday, including a 12-month rise in consumer prices of 2 percent, suggests inflation is moving within shouting distance of the Fed’s target.
A separate Labor Department report on Thursday put new claims for unemployment insurance last week at their lowest level since May 2007, the latest in a series of indicators suggesting a healthier labor market, including the upswing in payrolls reported by employers last month.
The American economy is still emerging from a very slow patch. The first estimate for the growth rate of the economy last quarter showed that output expanded at a rate of just 0.1 percent, and that number may even drop into negative territory when the Commerce Department revises the figure later this month. Other data this week on industrial production and housing has also been underwhelming, and even some relative optimists like Mr. Shepherdson foresee more headwinds for the housing market as rates rise.
Still, many private experts, as well as the policy makers at the Fed, argue that a substantial part of the weakness last quarter was caused by frigid temperatures and wintry conditions that delayed business activity in many part of the country, rather than a fundamental slowdown.
Private economists forecast overall growth in the United States could rise at an annual rate of 3 to 4 percent in the second quarter, the period of April, May and June.
The advance on the price front was widespread. “Virtually anywhere you look in this report, you see inflation is turning somewhat higher,” said Dean Maki, chief United States economist at Barclays. “Prices for services have risen at a solid pace for some time, but what’s changed as of late is that goods prices have started to firm up after actually dropping.”
For example, he pointed to increases in prices for new and used vehicles, airline tickets and prescription drugs, as well as for apartment and house rentals. “It’s not where you’d say there was an inflation problem, but the Fed is starting to get their wish for a move up in the inflation rate,” Mr. Maki added.
The less volatile core rate of the Consumer Price Index, which excludes food and energy prices, increased by 0.2 percent in April, compared with the 0.1 percent gain economists had expected.
Energy and food prices also rose sharply, lifting the total increase for consumer prices to 0.3 percent. Meat prices rose by 2.9 percent, the biggest monthly jump in more than a decade.
One reason that the Fed worries about persistently low inflation and the threat of deflation is that they discourage consumer spending and hold back investment. They are also difficult to overcome, as Japan’s experience in recent years has shown. Mr. Maki noted that while the Fed still possessed tools to combat inflation, it had few options in reversing deflation, with short-term interest rates near zero.
With inflation now showing signs of picking up, and a gradual improvement in the labor market bringing the unemployment rate down to 6.3 percent in April, the Fed is now on a glide path that could lead to the first increase in short-term rates, starting in the second half of 2015.
“If inflation continues to rise as we expect it to, and the unemployment rate keeps falling, it could potentially change the timing of the first rate hike and move it up slightly,” Mr. Maki said.
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