Saturday, 15 September 2007

US shows slowing growth now, may see accelerating inflation in future; China hikes rates

Recent US economic growth doesn't appear to be too strong, according to this Reuters report:

Retail sales rose a slim 0.3 percent last month, the Commerce Department said. When motor vehicles and parts were stripped out, retail sales fell 0.4 percent, the sharpest drop since September 2006.

The Fed said industrial production rose 0.2 percent, propped up by a surge in utility output that managed to offset drops at factories and mines.

Another government report showed that U.S. import prices fell unexpectedly in August by 0.3 percent, the first decline since the start of the year as petroleum costs also retreated.

Excluding a 1.3 percent drop in imported petroleum prices, import prices declined 0.1 percent last month, the Labor Department said...

The Reuters/University of Michigan Surveys of Consumers said its preliminary September figure on consumer sentiment was 83.8, slightly above a median forecast of 83.4 and the final August reading of 83.4.

A separate Commerce Department report showed the U.S. current account deficit narrowed in the second quarter to $190.8 billion, roughly in line with expectations, from an upwardly revised gap of $197.1 billion in the first quarter.

But the problem in the longer term, says Alan Greenspan, is inflation, according to this Bloomberg report:

The Federal Reserve may have to double its benchmark interest rate to at least 10 percent by 2030 to stem inflation, sparking a political showdown that could challenge its independence, former Chairman Alan Greenspan said.

Slowing productivity and rising wages abroad will probably cause U.S. inflation to accelerate in the next quarter century, Greenspan wrote in his book, "The Age of Turbulence: Adventures in a New World," published by Penguin Press. His outlook includes a reversal of many of the trends that aided the success of his own tenure at the Fed...

To keep inflation under 2 percent, "the Fed, given my scenario, would have to constrain monetary expansion so drastically that it could temporarily drive up interest rates into the double-digit range not seen since the days of Paul Volcker," Greenspan wrote.

A 10-percent interest rate and a 2-percent inflation rate suggests that Greenspan sees an 8 percent real interest rate. Probably not exactly, but it does give you a feel of the scenario he seems to be painting.

I guess this is what happens when the focus is almost exclusively on stabilising consumer price inflation.

A major reason that Greenspan sees accelerating inflation in the US is rising inflation in China.

"The rate of flow of workers to competitive labor markets will eventually slow, and as a result, disinflationary pressures should start to lift," Greenspan wrote. "China's wage growth should mount, as should its rate of inflation. The first signs are likely to be a rise of export prices, best measured by the prices of Chinese goods imported into the United States."

Costs of China's products are already rising in U.S. Labor Department statistics on import prices, he noted.

From the BLS report on import and export prices released yesterday:

Import prices from China rose 0.3 percent in August, the fourth consecutive month that the index has risen by at least that magnitude. Prior to May, the index had not risen by more than 0.2 percent since publication began in December 2003. Prices of imports from China increased 1.1 percent for the year ended in August.

And the inflation picture in China itself does indeed appear to be worsening, sparking yet another interest rate hike yesterday. From Bloomberg:

China raised interest rates for the fifth time since March to curb the fastest inflation since 1996 and damp speculation in stocks and real estate.

The benchmark one-year lending rate will increase to a nine-year high of 7.29 percent from 7.02 percent, starting tomorrow, the central bank said today on its Web site. The rate has risen from 6.12 percent on March 17...

Money supply grew 18.1 percent in August, exceeding the central bank's annual target of 16 percent for the seventh straight month. Urban fixed-asset investment climbed 26.7 percent in the first eight months of this year.

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