Monday, 4 April 2011

US inflation pressures rising

Data last week showed that inflation in the United States is rising.

The Commerce Department reported on Monday that the personal consumption expenditures price index rose 0.4 percent in February after rising 0.3 percent in January. Excluding food and energy, prices rose 0.2 percent in February, the same amount as in January.

The 12-month rate of increase of the PCE price index remained relatively low though. The overall index was up 1.6 percent in February from a year ago while the price index excluding food and energy was up 0.9 percent.

However, other data last week showed that inflation pressures are rising.

On Friday, the Institute for Supply Management reported that its index for prices in the manufacturing sector rose to 85.0 in March from 82.0 in February.

Also on Friday, the Labor Department reported that the US economy added 216,000 jobs in March and the unemployment rate fell to 8.8 percent from 8.9 percent in February. The unemployment rate has fallen a full percentage point since November and is now well down from its peak of 10.1 percent in October 2009. This indicates that resource slack in the economy is diminishing and could mean rising inflation pressure.

The Economic Cycle Research Institute also reported on Friday that its US future inflation gauge rose to 104.9 from 103.6 in February. “With the USFIG rising to a 31-month high, underlying inflation pressures are steadily building,” ECRI Chief Operations Officer Lakshman Achuthan said in the report.

Federal Reserve officials have made it clear that they are aware of the rising inflation pressures. Over the past week, several officials have said in speeches that it is appropriate for the Fed to start considering the removal of monetary stimulus. St Louis President James Bullard, who was instrumental in awakening analysts to the possibility of the Fed embarking on the securities-purchase programme that has since become known as QE2, even said that the Fed should consider terminating the latter early.

If the Fed does remove monetary stimulus, though, it is not likely to do so ahead of the European Central Bank. The ECB meets this Thursday and is almost certain to raise interest rates after hints by its officials over the past month or so of such a move, as well as a report last week that showed that inflation in the euro area rose to 2.6 percent in March from 2.4 percent in February.

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