Deller's two cents: The biggest concern and the biggest issue right now is the impact of higher energy prices (gasoline) and to a less extent food prices, on the recovery....lots of disagreement...are the higher energy prices short-term or will these higher prices be around for a while?
Economic Week in Review: Inflation stirs as moderate growth continues
April 15, 2011
The U.S. economic engine continues to chug along at a moderate pace, with the latest data showing strong industrial production, reasonable sales growth, and an uptick in inflation. For the week ended April 15, the S&P 500 Index fell 0.6% to 1,320 (for a year-to-date total return-including price change plus dividends-of about 5.5%). The yield of the 10-year U.S. Treasury note fell 16 basis points to 3.43% (for a year-to-date increase of 13 basis points).
Food and energy costs push up consumer prices
The Consumer Price Index (CPI) increased 0.5% in March, as expected. The cost of gasoline and food continued to rise and together accounted for almost three-quarters of the overall increase. Compared with a year earlier, consumer prices were 2.7% higher. The core CPI-which excludes more-volatile food and energy costs-remained tame, rising only 0.1% for the month. Year-over-year, the core CPI has gained 1.2%, a rate still lower than the Federal Reserve's comfort zone for core inflation of 2.0%-2.5%.
"As we closely monitor oil-related inflationary pressures, it's reassuring to see that core inflation readings are still low, and that higher energy prices are not fueling higher prices in the rest of the goods and services that average consumers normally buy," said Roger Aliaga-Díaz, Ph.D., a Vanguard senior economist. "While many investors may be alarmed by the 'headline' inflation numbers, analysts expect that the oil-price spikes are temporary, and we should see overall headline inflation readings coming back down to core inflation levels over time, and not the other way around."
Energy costs boost the producer price index too
The Producer Price Index (PPI), a gauge of inflation in the manufacturing process that can be a precursor to inflation in consumer prices, rose 0.7% in March. The increase, which was lower than expected, puts producer prices 5.8% higher than a year earlier. About 90% of the monthly increase was attributed to energy costs. As with the Consumer Price Index, when food and energy costs were excluded, the rise in the "core" PPI was lower, at 0.3%.
Fed report says the recovery is broadening
The recovery continued to broaden in March, according to the Federal Reserve's latest Beige Book survey of nationwide conditions. All of the Fed's 12 districts reported at least modest improvement in economic activity. Manufacturing continues to be strong, consumer spending continues to grow, and more than half the districts reported improvement in commercial real estate. Potential clouds on the horizon include possible supply-chain disruptions caused by the Japanese disaster and rising prices for energy and commodities, which could eventually exert upward pressure on wages.
Retail sales still growing, but at a slower pace
Growth in retail sales slowed in March, in part because of a decline in auto sales. Overall retail sales grew 0.4%, the slowest rate since June. However, excluding autos, sales growth was a more robust 0.8%, testifying to the health of underlying spending. Growth was led by the energy sector and also by housing-related sectors including furniture, building supply, and electronics and appliance stores. Sales were 7.1% above their year-ago level.
Industrial output increases more than expected
Industrial production-the output of the nation's manufacturers, mines, and utilities-rose 0.8% in March, above expectations and following modest increases in the previous two months. This puts first-quarter output growth at an annual rate of 6.0% compared with 3.2% in the fourth quarter of 2010. A healthy rise in motor vehicle production boosted overall output in the manufacturing sector. At least within the report's scope, Japan's natural disaster woes had not created any significant disruption in the manufacturing process. Capacity utilization rose to 77.4% from 76.9%, well below levels that would strain resources and stimulate inflation.
U.S. imports and exports decline slightly
The U.S. trade deficit narrowed to $45.8 billion in February from a revised $47.0 billion in January. Both exports and imports fell slightly. Consumption-based trade is growing, except for automobiles. Both car imports and exports slowed, which was attributed to worries about higher oil prices. The dollar depreciated against most major currencies in February, with the Federal Reserve's broad trade-weighted dollar index depreciating 0.8% over January. The period covered by the report didn't include the disaster in Japan; a slowdown in Japanese imports and exports is expected to show up in next month's report.
Business inventories rise less than expected
Total business inventories increased 0.5% in February, a bit lower than had been expected. The softer growth was mainly due to an outright decline in retail inventories. The total business inventories-to-sales ratio was 1.24, but the retail figure was 1.31, indicating retail inventories are the leanest they've been on record, dating back to early 1990s.
The economic week ahead
Next week-a relatively quiet one with the Good Friday holiday-will bring data on new residential construction (Tuesday) and existing-home sales (Wednesday), and the Conference Board's report on economic leading indicators on 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
