January 16, 2021

Nudged by Gas Prices, Wholesale Inflation Rises

Wholesale prices rose 0.8 percent in June compared with May, when prices rose 0.5 percent, the Labor Department reported on Friday. It was the biggest gain since a 1 percent increase in September and was driven by a 7.2 percent surge in gasoline prices.

Outside of the volatile energy and food sectors, core inflation was up just 0.2 percent in June.

Core prices have risen 1.7 percent over the last 12 months. Aside from sharp swings in gas prices, inflation has increased very slowly over the last year, giving the Federal Reserve the room to keep interest rates low to lift the economy.

The government’s Producer Price Index measures inflation before it reaches the consumer. Consumer prices have been rising at a modest rate as well. Over the 12 months ending in May, consumer prices outside of food and energy were up just 1.7 percent, below the Fed’s 2 percent target for inflation.

For June, energy prices at the wholesale level were up 2.9 percent, reflecting the big increase in gas prices. It was the biggest increase since February.

Food costs rose 0.2 percent in June, a moderation after a larger 0.6 percent May increase in food that had been driven in part by a surge in the price of eggs. For June, egg prices retreated, falling 26.8 percent, the biggest one-month drop in seven years.

The wholesale price of passenger cars rose 0.8 percent in June, the biggest increase since November 2011, but most other categories showed moderation. Furniture prices were up 0.3 percent.

Total wholesale prices were up 2.5 percent in June compared with a year ago.

Article source: http://www.nytimes.com/2013/07/13/business/economy/nudged-by-gas-prices-wholesale-inflation-rose-in-june.html?partner=rss&emc=rss

Stimulus by Fed Is Disappointing, Economists Say

But most Americans are not feeling the difference, in part because those benefits have been surprisingly small. The latest estimates from economists, in fact, suggest that the pace of recovery from the global financial crisis has flagged since November, when the Fed started buying $600 billion in Treasury securities to push private dollars into investments that create jobs.

As the Fed’s policy-making board prepares to meet Tuesday and Wednesday — after which the Fed chairman, Ben S. Bernanke, will hold a news conference for the first time to explain its decisions to the public — a broad range of economists say that the disappointing results show the limits of the central bank’s ability to lift the nation from its economic malaise.

“It’s good for stopping the fall, but for actually turning things around and driving the recovery, I just don’t think monetary policy has that power,” said Mark Thoma, a professor of economics at the University of Oregon, referring specifically to the bond-buying program.

Mr. Bernanke and his supporters say that the purchases have improved economic conditions, all but erasing fears of deflation, a pattern of falling prices that can delay purchases and stall growth. Inflation, which is beneficial in moderation, has climbed closer to healthy levels since the Fed started buying bonds.

“These actions had the expected effects on markets and are thereby providing significant support to job creation and the economy,” Mr. Bernanke said in a February speech, an argument he has repeated frequently.

But growth remains slow, jobs remain scarce, and with the debt purchases scheduled to end in June, the Fed must now decide what comes next.

The Fed generally encourages growth by pushing down interest rates. In normal times, it reduces short-term interest rates, and the effects spread to other kinds of borrowing like corporate bonds and mortgage loans. But with short-term rates hovering near zero since December 2008, the Fed has tried to attack long-term rates directly by entering the market and offering to accept lower returns.

The Fed limited the program to $600 billion under considerable political pressure. While that sounds like a lot of money, the purchases have not even kept pace with the government’s issuance of new debt, so in a sense the effort has amounted to treading water. And a growing body of research suggests that the Fed could have had a larger impact by spending more money on a broader range of debt, like mortgage bonds, as it did initially.

A vocal group of critics, meanwhile, argues that the Fed has already done far too much, amassing a portfolio of more than $2 trillion that may impede the central bank’s ability to raise interest rates to curb inflation. Some of these critics view the rising price of oil and other commodities as harbingers of broader price increases.

“I wasn’t a big fan of it in the first place,” said Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia and one of the 10 members of the Fed’s policy-making board. “I didn’t think it was going to have much of an impact, and it complicated the exit strategy. And what we’ve seen has not changed my mind.”

The Fed’s decision to buy bonds, known as quantitative easing, emulated Japan’s central bank, which started buying bonds in 2001 to break a deflationary cycle.

The American version worked well at first. From November 2008 to March 2010, the Fed bought more than $1.7 trillion in mortgage and Treasury bonds, holding down mortgage rates and reducing borrowing costs for well-regarded companies by about half a percentage point, according to several studies. That is an annual savings of $5 million on every $1 billion borrowed.

As the economy sputtered last summer, Mr. Bernanke indicated in an August speech that the Fed would start a second round of quantitative easing, soon nicknamed QE 2. The initial response was the same: Asset prices rose, interest rates fell, and the dollar declined in value.

But in addition to being smaller, and solely focused on Treasuries, there also was a problem of diminishing returns. The first round of purchases reduced the cost of borrowing by persuading skittish investors to accept lower risk premiums. With markets closer to normalcy, Mr. Bernanke warned in his August speech that it was not clear that the Fed would have comparable success in persuading investors to accept even lower rates of return.

“Such purchases seem likely to have their largest effects during periods of economic and financial stress,” he said.

The Fed says that its expectations were tempered by these realities, but that the program nonetheless has lowered yields on long-term Treasury bonds by about 0.2 percentage point relative to the rates investors would have demanded in the Fed’s absence. That is about the same impact the central bank might have achieved by lowering its benchmark rate 0.75 percentage point, which in normal times would be an aggressive move.

But some economists say the new program has had a more limited impact on the broader economy than would a traditional cut in short-term interest rates. The Fed predicted that investors would be forced to buy other kinds of debt, reducing rates for other borrowers. But the supply of Treasuries available to investors has grown since November, as issuance of new government debt outpaced the Fed’s purchases.

A study published in February found that interest rates decreased, but only for companies with top credit ratings. “Rates that are highly relevant for households and many corporations — mortgage rates and rates on lower-grade corporate bonds — were largely unaffected by the policy,” wrote Arvind Krishnamurthy and Annette Vissing-Jorgensen, both finance professors at Northwestern University.

Another indication of its limited success: Borrowing has not grown significantly, suggesting that corporations — which are sitting on record piles of cash — are not yet seeing opportunities for new investments. Until they do, some economists argue that the Fed is pushing on a string.

“What has it done? It has eased credit conditions, it has pumped up the stock market, it has suppressed the dollar,” said Mickey Levy, Bank of America’s chief economist. “But does the Fed think that buying Treasuries and bloating its balance sheet is really going to create permanent job increases?”

Article source: http://feeds.nytimes.com/click.phdo?i=a4c1e32f9981aaa78e23f7e1457a6c71