Deller's two cents: With Fed Chair Bernanke talking about "deflation" and the decision to monetize some of the new federal debt (i.e., buy the newest debt by printing money) has a lot of economists thinking that the Federal Reserve will become more aggressive in trying to stimulate the economy. The fear with a really aggressive monetary policy is that it can lead to inflation which hurts everyone, not just the unemployed. But with inflation so low (deflation?) the risks of unacceptable levels of inflation seems pretty low.
Economic Week in Review:
Flirting with deflation?
October 15, 2010
If you're old enough to remember the 1970s, you may think inflation is a dirty word. Lately, though, some economists (joined, this week, by the chairman of the Federal Reserve) have dared to utter an even dirtier one: deflation. For the week ended October 15, the S&P 500 Index rose 0.9% to 1,176 (for a year-to-date total return-including price change plus dividends-of about 7.1%). The yield of the 10-year U.S. Treasury note rose 16 basis points to 2.57% (for a year-to-date decrease of 128 basis points).
Inflation under control-but at what price?
In a speech on Friday, Fed Chairman Ben Bernanke all but declared victory in the long war against inflation. But in almost the next breath, he sounded a note of concern about an equally dreaded enemy.
"For the first time in many decades, [we] had to take seriously the possibility that inflation can be too low as well as too high," Bernanke said. "The risk of deflation is higher than desirable."
Most economists believe that deflation - a toxic combination of stagnant consumer demand and falling prices and wages - isn't an immediate threat. But data released earlier in the week suggested that inflation remains remarkably tame by historical standards, with the Consumer Price Index posting an unexpectedly modest rise of 0.1% in September.
However, while consumer prices held relatively steady, rising food and energy costs translated into slightly higher wholesale costs in September. Prices for finished goods rose by a greater-than-expected 0.4%, though the increase was just 0.1% with volatile food and energy prices factored out. (Key culprits in the rising cost of food: a 5.2% increase in meat prices, a 9% jump for wheat, and a 26.1% surge in the price of a bushel of corn.)
Still, Bernanke's deflation warning was underscored by minutes from the latest meeting of the Federal Open Market Committee, in which the nation's central bankers seemed to be taking a serious look at measures aimed at pumping money into the economy. An announcement could come after the Fed's next meeting, scheduled for early November.
Consumers open their wallets; businesses stock up
In a counterpoint to the anxiety over deflation, retail sales rose 0.6% in September (their third consecutive monthly increase), and August's figure was revised sharply upward, from 0.4% to 0.7%. Sales were 7.3% higher than in September 2009, buoyed by demand for autos and appliances. On a related note, business inventories were up 0.6% in August, beating consensus estimates.
"Even though the retail sector may be expecting an uptick in consumer demand, given the amount of slack in the economy, a couple months' worth of strong retail sales numbers cannot overturn the downward trend in inflation," said Vanguard economist Roger Aliaga-Díaz.
Jobless claims rise yet again
Hopes for a third straight week of improvement in the job market were dashed, with some 462,000 Americans filing first-time claims for unemployment benefits during the week ended October 9-up 13,000 from the previous week. Pennsylvania and New Jersey reported the biggest increases in first-time claims; California and Florida reported notable declines. Cold comfort for those who lost their jobs: The number of first-time unemployment claims was almost 10% lower than during the same week in 2009.
Trade deficit widens
Against the backdrop of a growing debate over the impact of currency valuation on international trade, Americans spent more on foreign-made goods as summer drew to a close. The monthly trade deficit grew $3.7 billion in August to $46.3 billion, a bit higher than consensus expectations. A drop in overseas demand for U.S.-made civilian aircraft took some of the blame, as did a slight increase in Americans' spending on foreign oil and oil-related products. The trade deficit with China-where policymakers continue to reject U.S. complaints about currency manipulation-jumped 8.2%, to $28 billion.
The economic week ahead
The Federal Reserve's Beige Book will be released on Wednesday, offering a bird's-eye view of nationwide economic activity during September. Also on tap are reports on industrial production (Monday),new residential construction (Tuesday), and leading economic indicators (Thursday).
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Steven C. Deller
Professor and Community Development Economist Department of Agricultural and Applied Economics
515 Taylor Hall --- 427 Lorch Street
University of Wisconsin-Madison/Extension Madison, WI 53706
608-263-6251
"I started out with nothing and I still have most of it left."
Seasick Steve=
