Daily Archives: March 17, 2011

Import prices in February climbed much faster than expected, as did producer prices, and the Federal Reserve adjusted the language in its latest FOMC statement to reflect the “upward pressure” on inflation from higher commodities prices.

But today’s CPI release showed that inflation in February was only slightly higher than consensus, so there probably won’t be any market surprises based on this — not with the extraordinary events happening elsewhere in the world. The headline number was up 0.5 per cent last month, and core grew by 0.2 per cent.

Still, the year-over-year gap between headline and core inflation continues to widen impressively. These are still low levels for both, but it’s worth mentioning that February was also the second straight month in which core inflation grew at 0.2 per cent — after not having exceeded 0.1 per cent since last June.

 

A rate rise was a serious option at the last meeting of Poland’s monetary policy committee. Minutes reveal that policymakers held a vote on a quarter point rate rise, but that the majority voted against it because of heightened doubt over growth, coupled with low drivers of aggregate demand (such as high unemployment and low wage pressure):

The majority … represented the view that recent data increased the uncertainty regarding economic growth… Further arguments in favour of this decision included the persistently high unemployment rate and modest wage pressures in the enterprise sector, both reducing the risk that heightened inflation, which up to now has resulted from factors beyond the direct influence of monetary policy, should persist. Furthermore, in the opinion of some Council members, NBP decisions on interest rates should take into account the monetary policy pursued by major central banks, in particular the European Central Bank.

 

Turkey’s central bank stepped in again this week to clear confusion over the effects of its unorthodox monetary policy, after the release of data that appeared to contradict comments made by officials. The trouble was caused by balance of payments data: it showed portfolio inflows of $2.3bn in January, higher than a year earlier and at odds with official claims that some $10bn of “hot money” had left the country since December, when the central bank began “quantitative tightening” to deal with macroeconomic imbalances.

Two clarifications from the central bank have cleared up the discrepancy. The balance of payments data showed foreign investors had sold out of Turkish equities since November, while increasing their exposure to debt instruments. But the figures did not include money market transactions, mainly in the form of swap operations. Here, the central bank said, there had indeed been an outflow of $11.5bn since November. 

Nobody knows how much of Mrs Watanabe’s foreign stash she intends to bring home. But the choices made by this mythical Japanese housewife – astute, and hunting for a better return than she can find at home – could help to explain the rapidly strengthening yen.

It makes sense that the average Japanese investor would want to repatriate their money at the moment. The average Japanese investor, after all, lives in Tokyo. Many have lost homes and possessions, with 430,000 estimated to be living in temporary accommodation (and it is winter). Others will be trying to move away from the Fukushima atomic power station. Still more are facing food shortages or rationing. In all these cases, cash is king. 

Chris Giles

There are numerous reasons to discount household survey measures of inflation expectations. Surveyed households want to let off steam about rising prices, they naively expect recent trends to continue and they have no expertise in predicting inflation. That said, the Bank has been rather bad at such predictions too!

Two measures of UK inflation expectations are out today – the Bank of England’s own survey and the long-running Barclays survey – and both will increase discomfort levels of most of the MPC members who do not entirely ignore these surveys.

It is not the short-term inflation expectations that will be a worry. On the Bank’s survey, the median expectation for inflation over the coming year is 4 per cent. That is a reflection of the Bank’s own forecasts for the annual inflation rate over the coming year. (Technical note: of course from today onward, the rise in the price level expected by the Bank is much lower as this post explained, but this is far too much detail for an expectations survey.) 

High and rising inflation has prompted a quarter point rate rise from the Reserve Bank of India, effective immediately. The move was largely expected. Both the repo and reverse repo rates are affected, now standing at 6.75 and 5.75 per cent, respectively.

Annual inflation rose to 8.31 per cent in February, against a target of 4-4.5 per cent. “The underlying inflationary pressures have accentuated, even as risks to growth are emerging,” said the Bank in a statement. “Risks to inflation remain clearly on the upside.”

In addition to food and energy related price pressure, inflationary risks are heightened by growing demand.