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Consumer Prices Fall Despite Stimulus, PPIP

It’s energy and food prices to a big extent, which is good, but even the whiff of deflation is precisely what scares the bejeezus out of policymakers. Coupled with an industrial production drop (about which, more below), and yesterday’s retail sales figures, the spectre can not be dismissed out of hand. From Bloomberg:

U.S. Economy: Consumer Prices, Industrial Production Decline

By Shobhana Chandra and Courtney Schlisserman

April 15 (Bloomberg) Consumer prices posted their first annual decline since 1955 and unused American manufacturing capacity reached a record, alleviating concern that Federal Reserve actions will cause inflation to soar.

The consumer price index fell 0.4 percent in March from a year before, and 0.1 percent from the previous month, the Labor Department said in Washington. Output at factories, mines and utilities dropped 1.5 percent last month, when the share of industrial capacity in use slid to 69.3 percent, the Fed said.

Today’s figures signal deflation, or prolonged price declines, is the bigger danger, and underscores Fed Chairman Ben S. Bernanke’s call for inflation to remain “quite low for some time.” The Fed’s record injections of cash into the economy have spurred warnings from some economists, including central bank historian Allan Meltzer, that consumer prices will surge.

“The more slack there is in the system, the longer it will take for inflation to become a concern,” said Carl Riccadonna, a senior economist at Deutsche Bank Securities Inc. in New York. “Production data look terrible. Things do not look good and this means the dramatic pace of layoffs we’ve been seeing in manufacturing for the last several months is likely to continue.”

A Fed survey today also showed that manufacturing in the New York area contracted in April less than forecast, an indication some businesses have adjusted to the economy’s lower level of demand, analysts said. The Fed Bank of New York’s general economic index rose to minus 14.7 from minus 38.2 the prior month, when the so-called Empire State index reached its lowest level since data began in 2001.

Dollar Rallies

Stocks and Treasuries were little changed, while the dollar rallied against the euro on demand for the U.S. currency as a haven amid concerns about the global economic outlook. The Standard & Poor’s 500 Stock Index was at 838.52 at 11:12 a.m. in New York, benchmark 10-year note yields were at 2.77 percent and the dollar rose 0.6 percent to $1.3182 per euro.

Foreign demand for Treasuries spurred a net inflow of long-term international capital into the U.S. in February, government figures showed. The Treasury said net purchases of long-term equities, notes and bonds totaled $22 billion, compared with selling of $36.8 billion in January.

Net foreign purchases of Treasury notes and bonds were 21.6 billion in February compared with purchases of $10.7 million a month earlier.

Forecast to Rise

Consumer prices were projected to rise 0.1 percent, according to the median estimate of 75 economists surveyed. Forecasts ranged from a drop of 0.3 percent to a gain of 0.5 percent.

Companies from General Motors Corp. to Macy’s Inc. are using incentives and promotions to draw customers as Americans contend with the biggest job losses in the post World War II era and shrinking wealth.

“We’re in a very deep global recession that’s going to hold prices down,” said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts, who accurately forecast the drop in CPI. “Deflation is still something that’s a risk, though I don’t think we’ll get into a deflationary spiral.”

Declining food and fuel costs brought overall prices lower. Energy costs dropped 3 percent, led by decreases in fuel oil and gasoline. Food expenses dropped 0.1 percent on lower costs for dairy and meat products.

Inflation, Deflation

Some economists argue disinflation could lead to outright deflation, which erodes profits, makes debts harder to repay and delays purchases by consumers and companies. Others caution that in the longer term, the unprecedented fiscal stimulus and the Fed’s policy of buying more assets and pumping money into the financial system will reignite inflation.

The cost of new cars rose 0.6 percent in March, the Labor report showed, even as automakers boosted discounts. Incentive spending by automakers jumped 30 percent in March from a year earlier to a record average $3,169, according to research firm Edmunds.com, helping to boost sales.

The decline in industrial production was led by decreases in consumer goods, including furniture and electronics, and by business equipment such as computers and communications gear.

“Businesses look like they are still quite uncertain about the outlook for the economy,” said Zach Pandl, an economist at Nomura Securities International in New York. “These production cuts are still necessary because inventories are still bloated.”

Intel Corp.’s Chief Executive Officer Paul Otellini yesterday said his company still faces a “fragile global economic environment.”

Sales of personal-computer processors likely bottomed out in the first quarter after manufacturers worked through their stockpiles of parts, Otellini said. While the worst of the slump is “probably now behind us,” the world’s biggest chipmaker isn’t ready to predict growth this quarter, he said.

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