Daily Archives: February 4, 2011

Robin Harding

I’ve done about 1,000 words for tomorrow’s paper about today’s payrolls numbers, the seasonal and statistical effects that Wall Street economists are arguing about, and the second month of divergence between the household and establishment surveys.

I don’t know what it all means and I think that’s the point: the Fed still has no clear steer on the labour market and will have to hope that it gets one by April.

Today also saw the annual benchmark revisions to the establishment survey. We already knew that it would show still lower employment as the US came out of the recession: 

France and Germany have called for an extraordinary summit of eurozone heads of state in the next few weeks to agree measures for greater economic policy co-ordination in Europe, to help boost competitiveness.

Angela Merkel and Nicolas Sarkozy took a break from negotiations at the summit of European Union leaders in Brussels to suggest the the 17 eurozone economies would need to reach agreement on concrete measures to improve the bloc’s economic performance and ensure the stability of Europe’s economic and political project. This would need to take place ahead of the next scheduled summit of all 27 EU members at the end of March, they said. 

Ralph Atkins

Did Jean-Claude Trichet, European Central Bank president, face an internal revolt after his tough stance last month on inflation? That is one interpretation of comments just made by Vítor Constâncio, his vice president.

After the ECB’s January meeting, Mr Trichet drove the euro sharply higher by warning interest rates might have to rise to combat accelerating inflation.  The ECB president boasted, then, how official borrowing costs had been hiked in July 2008, when the eurozone was in recession and Lehman Brothers’ collapse just two months away.

But after this month’s meeting, held on Thursday, Mr Trichet stuck a noticeably more sober tone. 

Bank Indonesia has taken the “last option”, raising its policy rate today by a quarter of one per cent, taking the policy rate to 6.75 per cent. It is the first rate rise since September 2008. Food price pressure was given as the main reason for the move.

The central bank indicated in mid-January that it would be prepared to increase rates, but said the timing would depend upon the success of other measures to reduce liquidity, such as raising reserve requirements. Deputy governor Hartadi A. Sarwono repeated last week that a rate hike was a possibility, but said it would be the last option. 

The era in which central bankers could apparently do no wrong ended emphatically in 2008. Since then, they have attracted plenty of criticism as they have adopted a succession of unconventional policies to stabilise the world economy and financial system. But now they could be facing an even more difficult problem – a commodity price shock which simultaneously raises headline inflation while also slowing the recovery from recession. The recent orthodoxy among central bankers is that they should ignore commodity price shocks because they are quickly self-correcting. Headline inflation will rise, but core inflation will not, so interest rates can be left unchanged. But does this orthodoxy need to be revised?

The orthodoxy about headline and core inflation is held most firmly by the US Fed. Yesterday’s speech by Ben Bernanke re-affirmed this set of beliefs in notably strong terms. He acknowledged that the economy is recovering (and his tone was a little more optimistic on that front than the most recent FOMC minutes), but he emphasised that core inflation would remain very subdued because unemployment and spare capacity are still very high. Therefore core inflation, and wage inflation, remain very subdued. The rise in oil and food prices, which are likely to impact the headline inflation rate considerably in the next few months, were given very short shrift.

This, then, is the orthodoxy. Spare capacity (usually measured by the output gap) determines the core inflation rate. Increases in commodity prices can, from time to time, lead to