Saturday, 12 April 2008

US consumer confidence falls, inflation may not

US consumer confidence fell in April. Bloomberg reports:

Confidence among U.S. consumers fell to a 26-year low after employers fired workers and gasoline prices surged, threatening the spending that accounts for more than two thirds of the economy.

The Reuters/University of Michigan preliminary index of consumer sentiment decreased to 63.2 this month, the weakest level since 1982, when the jobless rate approached 11 percent, the worst since the Great Depression...

The fall in consumer confidence comes as inflation expectations are rising.

Consumers polled in today's survey said they expect an inflation rate of 4.8 percent in a year, compared with 4.3 percent projected last month.

There are good reasons for the rise in inflation expectations.

In other figures released today, the Labor Department reported that the cost of imported goods climbed 14.8 percent in March from a year ago, led by oil...

Import prices rose 2.8 percent in March after a 0.2 percent gain the prior month, the Labor Department said. Expenses excluding fuels jumped 0.9 percent, the most since records began in 2001.

It is a similar situation in Japan. From AFP/CNA:

Japan's wholesale inflation rate hit a fresh 27-year high of 3.9 per cent in March as companies struggled to cope with soaring raw material and energy costs, a report from the central bank showed.

Producer price inflation accelerated from a revised annual rate of 3.6 per cent in February, the Bank of Japan said. It was the strongest rise in corporate goods prices since February 1981.

Inflation could hang around for quite a while longer, according to an ECB official. From Bloomberg:

European Central Bank council member Axel Weber said he doesn't see any scope to cut interest rates with inflation running at the fastest pace in almost 16 years...

"I fear that current inflation rates will remain for most of the year," Weber said. "It's important that there aren't any new inflationary pressures. We won't tolerate broad price pressures."

Morgan Stanley's Joachim Fels and Manoj Pradhan probably aren't surprised by all this inflation. They say that monetary policy in most of the major economies, including the euro area, are expansionary.

In the US, the Fed’s 200bp of rate cuts in 1Q have taken the actual fed funds rate way below the natural rate... Thus, US monetary policy is now firmly back in expansionary territory, as it was for most of this decade with the exception of 2000 and 2006-07...

In the euro area, our estimates also suggest that monetary policy is expansionary, though only moderately so... It should hardly come as a surprise then that inflation in the euro area is running significantly above the ECB’s comfort level...

[We] conclude that monetary policy in the three largest EM economies (China, India and Russia...) appears to be very expansionary at this stage... Against this backdrop, we reiterate our long-held view that inflation expectations are too low and investors would be well advised to buy protection against higher inflation.

Meanwhile, China's monetary policy may be expansionary but its trade surplus shrank 10 percent in the first quarter from a year ago despite a rebound in March.

The US trade balance hasn't benefited as a result. On Thursday, the Commerce Department had reported that the trade deficit widened 5.7 percent in February despite a fall in the deficit with China and a fall in the import of crude oil.

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