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Markets Will Look for Hints in Bernanke’s Words

August 24, 2011 by Leave a Comment

It was just a year ago, after all, that the economy was in almost exactly the same position: pitifully slow job and output growth, fears about another financial shock from Europe’s debt crisis, warnings of a double-dip recession. And a year ago, at this same conference, the chairman, Ben S. Bernanke, pointedly described all the weapons the Fed had available to rescue the economy — you know, just in case.

Several months later, the Fed opened its arsenal and began a major asset-purchasing program intended to stimulate growth.

Given Congress’s unwillingness to engage in more fiscal stimulus — in fact, it plans to pull back on spending — analysts and investors are wondering whether history will repeat itself, especially if the economy deteriorates further. Stock markets have been rallying this week, partly on hopes that Mr. Bernanke may signal more monetary stimulus is on the way, or at least under what conditions more stimulus would be likely. Broad stock indexes gained 3 percent or more on Tuesday, with the Dow industrial average pushing back above 11,000.

Among the options Mr. Bernanke is expected to lay out on Friday would be engaging in another round of major asset purchases, known as quantitative easing, which is meant to lower long-term interest rates; lowering the interest rate the Federal Reserve pays banks on their reserves; and extending the maturity structure of the Fed’s current portfolio of Treasuries, which analysts expect to be the most likely course of action. All these potential strategies would be intended to encourage more lending, among other goals, and thereby increase growth. The Fed might also raise its medium-term target for inflation, which would discourage banks, businesses and consumers from sitting on their cash, and so induce them to spend more.

But beyond such potential options, the announcement of a clear monetary policy road map seems unlikely. Fed speeches are constructed to cause minimal market excitement — either good or bad — and there are reasons to think Mr. Bernanke’s speech may be especially noncommittal.

First, only two weeks ago the board’s Federal Open Market Committee, which sets benchmarks on interest rates, severely dimmed its economic forecasts and took the unusual step of pledging to keep short-term interest rates near zero through at least mid-2013. It seems unlikely that the Fed would make major news so soon after that announcement, economists say.

“I don’t think the picture has changed all that much from two weeks ago,” said Paul Dales, senior United States economist at Capital Economics. “Suggesting more is in the pipeline already would smack of panic.”

Moreover, Mr. Bernanke could not unilaterally make a major policy change; he would need to seek approval from other Fed officials. Such consensus has become more challenging, since the composition of voting members on the Federal Open Market Committee has changed since last year.

Last year there was one steady dissenter, the Federal Reserve Bank of Kansas City president, Thomas M. Hoenig. Mr. Hoenig consistently voted against keeping short-term interest rates near zero for so long, and voted against the second round of quantitative easing begun by the Fed last November.

The voting members of the committee rotate each year, and now there is not one but three strongly hawkish voices: Narayana Kocherlakota, Charles I. Plosser and Richard W. Fisher, who are the presidents of the Federal Reserve Banks of Minneapolis, Philadelphia and Dallas, respectively. These three voted against the Aug. 9 announcement keeping short-term interest rates low through mid-2013, and so seem unlikely to endorse further easing measures.

There is also mounting political pressure from outside the Fed — on Capitol Hill and the presidential campaign trail — against expanding the central bank’s balance sheet.

Another reason Mr. Bernanke may be especially reluctant to signal commitment to further monetary stimulus is that inflation has picked up. Monetary stimulus, after all, generally increases inflation since it pumps more money into the economy and chases prices higher.

Last year, when economists gathered at Jackson Hole, the most recent consumer price index report had shown prices to have risen over the previous year by 1.2 percent. With inflation so low — and below the Fed’s target rate of inflation — many economists worried that the country could descend into a deflationary spiral akin to the one seen during the Great Depression, and more recently in Japan. With the threat of deflation, another round of quantitative easing seemed prudent, or at least less risky.

Today, though, consumer prices are 3.6 percent higher than a year ago, softening the case for further monetary stimulus. The Fed has a dual mandate, maximum employment and stable prices; even if Fed policy makers believe further easing might help employment, they may be reluctant to compromise the other half of their mandate.

The final reason Mr. Bernanke may be reluctant to go further is that it is not clear how powerful more monetary stimulus would be. And it is not just anti-Fed types like the presidential candidate Rick Perry who doubt the usefulness of more easing; Ph.D. economists are skeptical too.

“At this point you’re really pushing on a string,” said Nigel Gault, chief United States economist at IHS Global Insight.

Economists are still debating the effectiveness of the quantitative easing program begun last November, raising questions about the potency of yet more asset purchases.

Quantitative easing is supposed to help lending (and thereby growth) by pushing down long-term interest rates, which are already quite low. It is not clear that lowering them further would do much to encourage lending, especially since many companies do not see a need to borrow primarily because demand is so weak, and not because credit is expensive.

The other way that quantitative easing is intended to help spur growth is by encouraging investment in riskier assets, like stocks, because the return is so low on long-term Treasuries. If investors flee to these assets — as they did last year, following the Jackson Hole speech — that could raise the price of these assets, causing consumers to feel richer and so more comfortable with spending.

Commodity prices are higher today than they were a year ago, though, and policy makers may worry about pushing them even further up. If energy and food prices rise again, that would actually discourage consumers from spending.

For these reasons, many economists say they believe that, should the Fed engage in more stimulus, it will be unlikely to select quantitative easing as its weapon. But the other options, too, present their own hurdles, and many are still untested.

In the end, economists say, any additional Fed action may depend on what seems most politically palatable, even though the central bank is officially an independent entity. And that logic seems to point to changing the maturity of the assets on the Fed’s balance sheet.

Article source: http://www.nytimes.com/2011/08/24/business/markets-will-look-for-hints-in-bernankes-words.html?partner=rss&emc=rss

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High & Low Finance: Sometimes, Inflation Is Not Evil

August 12, 2011 by Leave a Comment

Thirty years ago, it became clear that defeating inflation was crucial, even if the means needed to accomplish that would cause a deep recession. By the time the European Central Bank was created in the 1990s, it seemed so obvious that inflation must be fought that the bank was given only one mandate — to fight inflation. The other mandate given to its United States counterpart, the Federal Reserve — to promote employment — was pointedly not included.

It is time for a new lesson to be learned. Sometimes we need inflation, and now is such a time.

Had the central bankers of the world understood that inflation in asset prices could be just as bad as, if not worse than, inflation in the prices of consumer goods, this would not be necessary. But they did not. So they did nothing to resist soaring home prices, just as they had seen no reason to worry about the Internet stock bubble.

When pressed, they would say they knew what to do if an asset bubble did burst — ease monetary policy. That seemed to work after the Internet bubble burst, and the ensuing recession was a mild one that did little damage to anyone except foolish investors. But the strategy only worsened the housing bubble and has not done much to revive the debt-choked economy over the last two years.

In 2008, when the credit crisis brought the world economy to a screeching halt, governments and central banks stepped in to bail out large financial firms on the theory that a decently functioning financial system was a prerequisite to economic recovery.

That analysis was correct, but there were at least two problems with the fix:

First, at least some banks were not really made healthy again. That was especially true in Europe, where recapitalization of banks proceeded slowly. They were thus vulnerable to a new round of credit worries, this one based on sovereign debt issues.

Second, this country is full of people whose homes are worth less than they owe. That provides threats to the lenders and to the borrowers. Those borrowers need debt relief, but there are many issues that have prevented any real action.

Simply put, you can’t operate an economy where huge numbers of people are desperately in debt and have no real way out. We need to either find a way to reduce what they owe or to raise the value of the homes securing the loans, or some of both.

In a column in The Financial Times this week, Ken Rogoff, the Harvard economist, suggested central bankers consider “the option of trying to achieve some modest deleveraging through moderate inflation of, say, 4 to 6 percent for several years.”

Mr. Rogoff conceded that “any inflation above 2 percent may seem anathema to those who still remember the anti-inflation wars of the 1970s and 1980s.”

He was right about that.

“I don’t think it’s a good idea,” was one of the milder comments I got from the most celebrated veteran of those wars, Paul A. Volcker, the former Fed chairman.

And anyway, he added, “Right now they probably could not get inflation if they wanted to.” People are not spending the money they have, he said, adding that the situation reminded him of an era he studied in college — the Great Depression.

In an interview, Mr. Rogoff recalled how a parade of economists suggested to Japan that it seek to raise inflation to an announced target after its bubble burst, how Japan did nothing of the kind, and how it never really recovered. The Fed, he said, could make clear that it wanted some inflation and would buy Treasuries until it got that result.

“It has to be open-ended,” he said of such a program, not limited to a certain dollar amount of bond purchases, and it needs to be connected to a stated inflation target. The Fed chairman, he said, could say that “If and when inflation starts rising above the path I am aiming for, we will taper back bond purchases and raise interest rates to rein it back in.”

As it is, millions of mortgage loans secured by homes are worth far less than the loan amount. That keeps people from moving in search of better opportunities, and it removes an incentive for maintenance spending to preserve the value of the home. Many of those loans will never be paid in full, but there seems to be no route to a quick resolution.

Article source: http://feeds.nytimes.com/click.phdo?i=ff8518a4a1c6f8e3f23c825c681ef83a

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Economix Blog: The Fed Splits

August 11, 2011 by Leave a Comment

FLOYD NORRIS

FLOYD NORRIS

Notions on high and low finance.

There is more than meets the eye to the split at the Federal Reserve. There must be.

The Fed’s statement Tuesday afternoon says that the majority “currently anticipates that economic conditions — including low rates of resource utilization and a subdued outlook for inflation over the medium run — are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.”

Three dissenters said that they “would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an extended period.”

Now there’s something to fight over. I say we need low rates “at least through mid-2013.” You say “an extended period.”

All this sounds like much ado about very little, but the Fed majority is all but promising that rates will stay low for nearly two years. We used to think “an extended period” could mean a few months.

In reality, the statement was an implicit invitation to traders to drive rates down further on the two-year Treasury note, and that happened immediately. Before the announcement the two-year rate was around 0.27 percent. Now it is 0.19 percent. That is a record low. Two weeks ago it was over 0.4 percent.

The initial stock market reaction was negative, presumably because there was some hope that the Fed would do more — like start another quantitative easing program, QE3. Instead there is a promise that the Fed “will maintain its existing policy of reinvesting principal payments from its securities holdings. The committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.”

In other words, they might do a QE3. Or they might not.

Perhaps the dissenters really want to essentially say something like “We’ve done all we can, and if the economy is still lousy, that is for someone else to deal with.” And the majority is unwilling to do that.

As it is, the Fed has signed on to the widespread perception that the economy is getting worse. But it is not doing a whole lot.

The fact that the Fed chairman, Ben S. Bernanke, now has three dissenters is a sign that the Fed, like one or two other Washington institutions you might be able to name, is less and less able to speak with one voice.

Article source: http://feeds.nytimes.com/click.phdo?i=61f732b352df3e35e5ee1d69d7cc0d86

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India’s Economy Grew 7.8 Percent in January-March Quarter

May 31, 2011 by Leave a Comment

NEW DELHI — India’s economy grew at a slower 7.8 percent in the January-March quarter from the same period a year earlier, as rising interest rates crimped consumption and investment.

The pace of growth eased from the 8.3 percent expansion in the previous quarter and fell below the median forecast for growth of 8.2 percent in a Reuters poll.

For the full 2010-11 fiscal year, which ended in March, the economy grew 8.5 percent, compared with the government’s forecast of 8.6 percent.

“Not a disaster, but adds to the idea that E.M. growth is cooling as tighter policy kicks in,” said Jonathan Cavenagh of Westpac Institutional Bank in Singapore, referring to emerging markets.

With inflation still elevated, he said, the Reserve Bank of India is likely to keep raising interest rates, “which will not be welcome by the equity market.”

Most economists expect the central bank to raise its main policy interest rate by 25 basis points at its review on June 16, after it raised its key rates by a bigger-than-expected 50 basis points in May.

India’s farm sector expanded at 7.5 percent during the January-March quarter from the year-earlier period.

Meanwhile, manufacturing grew 5.5 percent in the same period, less than the 6 percent annual growth seen in the previous quarter.

Agriculture is expected to perform well for the second straight year after the government forecast a normal monsoon in 2011. Prospects for the summer harvest got a boost after annual monsoon rains hit the southern state of Kerala two days ahead of schedule.

Still, rising borrowing costs and higher input prices have started to crimp consumer demand.

The Reserve Bank of India has raised its policy rate by a total of 250 basis points in nine moves since March 2010 as part of battle against stubbornly high inflation. Analysts have forecast an additional increase of 75 basis points by the end of December.

April car sales rose at their slowest pace in nearly two years, rising 13.2 percent from a year earlier, as higher interest rates, fuel prices and vehicle costs crimped demand in the world’s second-fastest growing auto market, after China.

Construction of big projects was delayed during the winter over environmental clearances as well as difficulty securing coal for new power plants.

Article source: http://feeds.nytimes.com/click.phdo?i=607345f4e5686d286235924e5f2758e0

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Retailers Fall Short as Shoppers Cut Back

May 22, 2011 by Leave a Comment

The net loss was $170 million, or $1.58 a share, Sears said in a statement Thursday. That compared with a $16 million profit a year earlier.

Separately, Gap, the apparel chain, cut its full-year profit forecast by one-fourth as costs rose faster than expected.

Sales at Sears sank about 3 percent to $9.7 billion. Sears faces increasing competition from other department stores and discount chains. Target, which reported first-quarter results on Wednesday, said shoppers were staying cautious about spending.

“Our first quarter was adversely impacted by unfavorable weather, economic pressures facing our customers, and comparisons to last year’s government-sponsored stimulus program relating to the purchase of appliances,” Louis J. D’Ambrosio, Sears’s chief executive, said in the statement. “However, we also fell short on executing with excellence.”

Shares of Sears fell $1.99, or 2.6 percent, to $73.86.

Sears brought in Mr. D’Ambrosio in February after a three-year search for a chief. He told shareholders at the company’s annual meeting this month that Sears would expand services and technology to increase sales and understand customers better. The company also hired a new head of apparel, long a struggling unit, earlier this year.

Sales at stores open at least a year fell 5.2 percent at domestic Sears stores and 1.6 percent at its Kmart chain last quarter, with appliance, clothing and consumer electronics sales driving the decline.

Gap, meanwhile, said its fiscal 2011 profit would be $1.40 to $1.50 a share. Gap had previously forecast a maximum of $1.93 a share.

Expenses per unit will rise 20 percent in the second half, outweighing price increases, Gap said. The apparel industry is facing cost inflation for the first time in two decades because of surging cotton prices and increased pay for workers who make clothes in China and other parts of Asia. Retailers have said they plan to raise prices to counter the higher costs.

First-quarter net income fell 23 percent to $233 million, or 40 cents a share, in the period ended April 30, from $302 million, or 45 cents, a year earlier. Analysts projected 39 cents, the average of 28 estimates compiled by Bloomberg.

Same-store sales fell 3 percent in the first quarter at the chain’s Gap brand.

Gap has closed underperforming stores and shrunk other locations in the United States. The retailer is now looking overseas for sales growth by expanding into new regions in the past year, including China and Italy.

Article source: http://feeds.nytimes.com/click.phdo?i=02add28c9013032989ae9aaa3e010bb9

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Many With New College Degree Find the Job Market Humbling

May 19, 2011 by Leave a Comment

Now evidence is emerging that the damage wrought by the sour economy is more widespread than just a few careers led astray or postponed. Even for college graduates — the people who were most protected from the slings and arrows of recession — the outlook is rather bleak.

Employment rates for new college graduates have fallen sharply in the last two years, as have starting salaries for those who can find work. What’s more, only half of the jobs landed by these new graduates even require a college degree, reviving debates about whether higher education is “worth it” after all.

“I have friends with the same degree as me, from a worse school, but because of who they knew or when they happened to graduate, they’re in much better jobs,” said Kyle Bishop, 23, a 2009 graduate of the University of Pittsburgh who has spent the last two years waiting tables, delivering beer, working at a bookstore and entering data. “It’s more about luck than anything else.”

The median starting salary for students graduating from four-year colleges in 2009 and 2010 was $27,000, down from $30,000 for those who entered the work force in 2006 to 2008, according to a study released on Wednesday by the John J. Heldrich Center for Workforce Development at Rutgers University. That is a decline of 10 percent, even before taking inflation into account.

Of course, these are the lucky ones — the graduates who found a job. Among the members of the class of 2010, just 56 percent had held at least one job by this spring, when the survey was conducted. That compares with 90 percent of graduates from the classes of 2006 and 2007. (Some have gone for further education or opted out of the labor force, while many are still pounding the pavement.)

Even these figures understate the damage done to these workers’ careers. Many have taken jobs that do not make use of their skills; about only half of recent college graduates said that their first job required a college degree.

The choice of major is quite important. Certain majors had better luck finding a job that required a college degree, according to an analysis by Andrew M. Sum, an economist at Northeastern University, of 2009 Labor Department data for college graduates under 25.

Young graduates who majored in education and teaching or engineering were most likely to find a job requiring a college degree, while area studies majors — those who majored in Latin American studies, for example — and humanities majors were least likely to do so. Among all recent education graduates, 71.1 percent were in jobs that required a college degree; of all area studies majors, the share was 44.7 percent.

An analysis by The New York Times of Labor Department data about college graduates aged 25 to 34 found that the number of these workers employed in food service, restaurants and bars had risen 17 percent in 2009 from 2008, though the sample size was small. There were similar or bigger employment increases at gas stations and fuel dealers, food and alcohol stores, and taxi and limousine services.

This may be a waste of a college degree, but it also displaces the less-educated workers who would normally take these jobs.

“The less schooling you had, the more likely you were to get thrown out of the labor market altogether,” said Mr. Sum, noting that unemployment rates for high school graduates and dropouts are always much higher than those for college graduates. “There is complete displacement all the way down.”

Meanwhile, college graduates are having trouble paying off student loan debt, which is at a median of $20,000 for graduates of classes 2006 to 2010.

Mr. Bishop, the Pittsburgh graduate, said he is “terrified” of the effects his starter jobs might have on his ultimate career, which he hopes to be in publishing or writing. “It looks bad to have all these short-term jobs on your résumé, but you do have to pay the bills,” he said, adding that right now his student loan debt was over $70,000.

Many graduates will probably take on more student debt. More than 60 percent of those who graduated in the last five years say they will need more formal education to be successful.

“I knew there weren’t going to be many job prospects for me until I got my Ph.D.,” said Travis Patterson, 23, a 2010 graduate of California State University, Fullerton. He is working as an administrative assistant for a property management company and studying psychology in graduate school. While it may not have anything to do with his degree, “it helps pay my rent and tuition, and that’s what matters.”

Going back to school does offer the possibility of joining the labor force when the economy is better. Unemployment rates are also generally lower for people with advanced schooling.

Those who do not go back to school may be on a lower-paying trajectory for years. They start at a lower salary, and they may begin their careers with employers that pay less on average or have less room for growth.

“Their salary history follows them wherever they go,” said Carl Van Horn, a labor economist at Rutgers. “It’s like a parrot on your shoulder, traveling with you everywhere, constantly telling you ‘No, you can’t make that much money.’ ”

And while young people who have weathered a tough job market may shy from risks during their careers, the best way to nullify an unlucky graduation date is to change jobs when you can, says Till von Wachter, an economist at Columbia.

“If you don’t move within five years of graduating, for some reason you get stuck where you are. That’s just an empirical finding,” Mr. von Wachter said. “By your late 20s, you’re often married, and have a family and have a house. You stop the active pattern of moving jobs.”

Article source: http://feeds.nytimes.com/click.phdo?i=13fef1b24340d720ebc1f9d180307acd

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China’s Efforts to Cut Inflation Fall Short

May 11, 2011 by Leave a Comment

The latest data underlined the challenges that China faces as it tries to tame inflation while at the same time issuing trillions of extra renminbi to prevent the currency from rising quickly against the dollar, which would erode the competitiveness of Chinese exports.

Consumer prices were 5.3 percent higher in April than a year earlier. That represented a slight improvement from March, when consumer prices were up 5.4 percent. But economists had expected inflation to edge down to 5.2 percent or below, and the government’s target for the full year is 4 percent, a level not reached in any month so far this year.

Many businesses across China say that they see healthy sales and have the profits or bank lines of credit to allow them to invest in further expansion.

“Our domestic market is doing very well and continues to expand,” said He Lei, the vice general manager of the Zhejiang Qingsen Textile Garments Company. “Our year-on-year growth in this sector has been 30 percent.”

The Shanghai Composite Index of shares fell 0.6 percent in the first half-hour of trading after the release of the economic data, as investors appeared to conclude that persistent inflation made it more likely that the government would raise interest rates again, after already doing so four times since October.

Other economic statistics also released by the Chinese government on Wednesday presented a picture of an economy still expanding briskly, signaling that recent government moves to tighten credit have not had much effect.

Banks issued 739.6 billion renminbi ($114 billion) in new loans last month, higher than economists’ expectations of 700 billion. The People’s Bank of China, the country’s central bank, has been trying to restrain lending by raising repeatedly the percentage of bank assets that must be kept on deposit with it, but this has been offset by the large-scale issuance of renminbi to pay for currency market intervention, holding down the currency’s value against the dollar.

Retail sales jumped 17.1 percent in April from a year ago. Fixed asset investment grew even faster, climbing 25.4 percent last month from a year earlier, although Chinese fixed asset investment figures tend to be inflated somewhat by rising land prices, a factor that Western statisticians try to exclude.

Western economists had expected inflation to slow more quickly because food prices in China are flat or falling this year, unlike in many countries. Food is the largest component of China’s consumer price index, making up a third of it.

After vegetable prices surged at the end of 2009, partly because of a harsh winter, the Chinese government urged farmers across the nation to plant more vegetable farms. This winter was milder, and vegetable production surged so sharply that prices have fallen, leading to widespread complaints from farmers but limiting the cost of groceries for urban families.

Many economists had expected falling food prices to offset more fully the effects of rising world prices for many commodities, like oil and cotton. Changes in wholesale food prices are quickly and entirely reflected in changes in the prices that consumers pay for food at supermarkets and corner stalls.

But Jun Ma, an economist at Deutsche Bank, estimated in a research note on Tuesday that when prices of other commodity prices rise or fall in China, the price of the eventual retail product only rises or falls by one-sixth as much in percentage terms. That is because other raw materials, like rubber or cotton, tend to play a small role in the overall price of products like tires or clothing.

Hilda Wang contributed reporting.

Article source: http://feeds.nytimes.com/click.phdo?i=1fe19c8c4e903234e899200cde99f53f

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Interest Rates in India Raised to Slow Inflation

May 4, 2011 by Leave a Comment

MUMBAI — In a bid to rein in persistently high inflation, India’s central bank raised interest rates on Tuesday more than analysts had expected and signaled that it would be willing to raise borrowing costs even further.

The action, which caused the country’s stock market to close 2.4 percent lower, will make it harder for India to achieve the 9 percent growth target set by the government for the current financial year, which ends in March 2012.

The central bank, the Reserve Bank of India, acknowledged that concern but said it had to act to make sure the economy did not suffer long-term damage from rising prices; the central bank said it expected the economy to grow 8 percent, down from 8.6 percent in the previous year.

That slower growth will make it harder for India, the second-fastest-growing major economy in the world, behind China, to pull hundreds of millions of people out of poverty. And it will most likely worsen the Indian government’s already large fiscal deficit.

India has been struggling to control rising prices, especially for food and energy. But in recent months, the cost of other goods has also jumped, raising concern that the Indian economy is overheating.

In March, the country’s benchmark wholesale price index jumped 9 percent and a consumer price index for industrial workers was up 8.8 percent.

On Tuesday, the bank raised its repo rate at which it lends money to banks half of a percentage point, to 7.25 percent. Most analysts had expected an increase of a quarter of a point, which would have been in keeping with the modest increases the central bank has been making in the last year.

The central bank also raised rates on bank savings accounts by one-half point, to 4 percent.

Including the most recent increase, the central bank has raised the repo rate 4 percentage points in the last 12 months. The governor of the central bank, Duvvuri Subbarao, said the bank was willing to risk slowing the economy in the short run to prevent inflation from damaging the longer-term prospects for growth.

“Current elevated rates of inflation pose significant risks to future growth,” Mr. Subbarao said in a statement. “Bringing them down, therefore, even at the cost of some growth in the short run, should take precedence.”

Even before this most recent rate increase, India’s economy had been slowing because of a drop in private investment. Now, analysts say they expect growth to slow faster, even as inflation remains high.

“In the near term, it’s going to be a difficult adjustment for the economy,” said Sonal Varma, an economist at Nomura Securities in Mumbai. “That is the sacrifice that the R.B.I. is making.”

The central bank’s more aggressive stance on inflation will most likely increase pressure on the government to embrace structural policy changes and increase investment in infrastructure.

For instance, Indian officials have long discussed changes to improve productivity and reduce waste in its agricultural sector, where more than half of its people work.

But the government has been reluctant to adopt many of those changes because they are politically unpalatable.

“There are a whole gamut of administrative measures that are needed to bring down structural inefficiencies in the system to bring down inflation,” said Samiran Chakraborty, head of research at Standard Chartered Bank in Mumbai. “As long as those measures are not taken, monetary policy has to do double duty.”

Article source: http://feeds.nytimes.com/click.phdo?i=bff8c2c2f9f1c998f410b0a7c2bfe06b

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Economix: Inflation? Not in Wages

April 1, 2011 by Leave a Comment

One of the big questions facing the Federal Reserve is whether the recent rise in oil and food prices will turn into an inflationary spiral. Today’s jobs report suggests that the answer, at least so far, is that there is little reason to worry about such a spiral.

The average hourly wage across the economy — including salaried employees — did not grow at all in March. It was $22.87, just as it had been in February. And from January to February, it rose only a single cent.

Over the last year, hourly wages have grown 1.7 percent. That matches the smallest annual increase since the recession began, in late 2007. In the middle of 2009 — when the economy was still shedding hundreds of thousands of jobs a month — the annual increase was significantly larger: about 2.5 percent.

It’s all but impossible to have an inflationary spiral if wages are not rising rapidly. Companies may want to increase prices because their energy costs are rising, but if customers don’t have the buying power to pay higher prices, most price increases won’t stick.

On the whole, today’s jobs report was a solid one, showing an acceleration of job gains. (And more on them shortly.) But to the extent that Fed officials are trying to decide whether the bigger risk is an economy that may be too strong — with inflation about to soar — and an economy that may be too weak, the evidence from the job market is quite clear. The economy remains years away from full employment, and wages are barely rising at all.

Article source: http://feeds.nytimes.com/click.phdo?i=df218729be3e2e936ccf98072b6613f4

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