Monday, 20 September 2010

Deflation not yet imminent in the US

Last week's economic reports provided few signs that deflation is an imminent threat in the United States.

Despite concerns of a slowing economy and a possible double dip, last week's US economic data were mixed at worst.

Consumer spending appears to be holding up. A Commerce Department report on Tuesday showed that retail sales rose 0.4 percent in August, better than the 0.3 percent rise in July. Excluding autos, gasoline and building materials, retail sales rose 0.6 percent in August after a 0.1 percent decline in July.

Nevertheless, consumer confidence is weakening. The University of Michigan's preliminary September reading on consumer sentiment released on Friday fell to 66.6, the weakest reading since August 2009, from 68.9 in August.

Meanwhile, industrial production is slowing. A Federal Reserve report on Wednesday showed that industrial output rose 0.2 percent in August, down from a rise of 0.6 percent in July.

Furthermore, the longer-term trends for both retail sales and industrial production suggest that their rates of recovery have probably peaked.

Meanwhile, other reports last week showed that inflation persists in the US economy.

A report on Friday by the Labor Department showed that consumer prices rose 0.3 percent in August, the same as in July. Consumer prices rose 1.1 percent in the twelve months to August.

A day earlier, the Labor Department had reported that producer prices rose 0.4 percent in August, up from 0.2 percent in July. They were up 3.1 percent from a year earlier.

A slowing economy though could put the economy at risk of deflation. The Federal Reserve report on Wednesday showed that industrial capacity utilisation increased to 74.7 percent in August from 74.6 percent in July. The August reading means that capacity utilisation remains well below the average utilisation rate of 80.6 percent for the period from 1972 to 2009, providing significant deflationary pressure on the economy.

On the bright side, the trend in capacity utilisation remains positive. The August reading was the highest since November 2008. So while there is deflationary pressure, it is actually diminishing.

A pronounced loss of momentum in the economy, of course, would change the outlook.

Until clearer evidence of that appears, however, deflation is probably not imminent in the US.

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