Fed Confidence in Transitory Inflation Hinges on Low Wage Gains

Discussion in 'Economics' started by olias, Apr 26, 2011.

  1. olias


    Good article from Bloomberg:


    "Brady Miller is paying more for vinyl siding for his construction business and for groceries to feed his family. He can’t charge customers more, showing why some Federal Reserve officials say inflation will ease.

    “We don’t spend money on anything, we don’t take vacations, and I am not saving money right now,” Miller, 36, says. He has told his wife that he is going to drive their 2005 Dodge Caravan “until that thing falls apart.”

    The Mossville, Illinois, homebuilder also hasn’t given his crew of two a raise in two years and says they shouldn’t expect one soon. Their predicament illustrates the downside of what Fed Vice Chairman Janet Yellen calls “transitory” inflation: Household purchasing power is shrinking because wages and salaries aren’t keeping pace with food and energy prices.

    Researchers at the Federal Reserve Bank of New York are also finding no evidence that higher prices are boosting expectations for wage increases, suggesting underlying inflation and consumer spending will remain low. That’s why officials led by Fed Chairman Ben S. Bernanke will be in no hurry to withdraw record stimulus after completing a $600 billion bond-purchase program in June, said Michael Feroli, chief U.S. economist at JP Morgan Securities LLC.

    “It’s tough,” Feroli said. “Consumers will have to reduce real spending” if they don’t draw down savings or take on more debt. He said the Fed will probably keep its balance sheet constant by reinvesting maturing bond proceeds for several weeks after it stops outright purchases. It may then allow the record $2.69 trillion balance sheet to “passively decline” in the second half of this year as investments mature, said Feroli.
    Stay Near Zero

    Feroli is also among analysts who say the Federal Open Market Committee, which concludes a two-day meeting tomorrow, is likely to repeat that the key interest rate will stay near zero for “an extended period.”

    Economists at New York-based JPMorgan Chase & Co. cut their estimate for U.S. growth in the first quarter to a 1.4 percent annual rate from 2.5 percent. That would be less than half the fourth quarter’s 3.1 percent pace. One reason for the slowdown: consumer dollars after inflation buy fewer goods and services.

    The consumer price index rose 2.7 percent for the year that ended in March, the fastest 12-month pace since December 2009. Average hourly earnings, adjusted for inflation, fell 1 percent during the same period.

    “If the labor market were tight, workers could say, ‘I am getting squeezed, can I get a raise?’” said Julia Coronado, chief economist for North America at BNP Paribas in New York. That’s not an option with 13.5 million unemployed Americans competing for work and a jobless rate of 8.8 percent, she said.
    Political Unrest

    Inflation is accelerating as political unrest in the Middle East drives up the price of crude oil, and rising demand in China and other emerging markets -- coupled with droughts in grain-exporters such as Russia -- pushes up food prices. The average price for unleaded gasoline stands at $3.86 per gallon, according to the American Automobile Association, a 35 percent increase from a year ago.

    The breakeven rate for two-year Treasury Inflation Protected Securities, the yield difference between the inflation-linked debt and comparable maturity Treasuries, has risen to 2.57 percentage points in New York from 2.48 percentage points at the end of March.

    Petroleum-based homebuilding materials like shingles and felt paper “have consistently gone up” in price, Miller said. “I have had to lower my margins just to keep busy” in the face of tighter competition during the recent economic downturn, he said. “I am getting my ass kicked.”

    Excluding food and energy, which tend to be volatile, consumer prices rose 1.2 percent in March from a year earlier. A gauge watched by Fed policy makers, which tracks prices tied to consumer spending, rose by 0.9 percent. That compares with the Fed’s long-term goal of about 2 percent inflation.
    Recent ‘Shocks’

    “Recent commodity price shocks are likely to have only a transitory effect on inflation,” Yellen said in an April 11 speech to the Economic Club of New York. “With resource slack likely to diminish only gradually over the next few years, it seems reasonable to anticipate that underlying inflation will remain subdued for some time,” she said.

    Yellen said the Fed’s current “accommodative stance” is still appropriate because “unemployment remains elevated” and “longer-run inflation expectations remain well anchored.”

    How households form expectations for future inflation is the subject of research by New York Fed economists who teamed up with behavioral psychologists from Carnegie Mellon University in Pittsburgh and researchers from RAND Corp., the Santa Monica, California-based research firm.
    Median Wage Growth

    Their survey of about 400 people in February showed that year-ahead median wage growth expectations remained below 1 percent, where they have been since February 2009.

    “While this is a troubling sign for wage earners’ incomes, it suggests that concerns about wages exerting second-order effects on inflation are not founded at present,” New York Fed economist Giorgio Topa and colleagues wrote in an April 18 blog.

    That hasn’t stopped some companies from passing rising costs on to consumers. Ford Motor Co. (F), the second-largest U.S. automaker, raised prices by $117, or 0.4 percent, per vehicle this month because of higher costs for raw materials such as steel.

    Hartford, Connecticut-based United Technologies Corp. (UTX), the world’s largest maker of air conditioners, increased prices about 2 percent to 6 percent in its Carrier residential division in February to offset higher prices for copper.

    “Those prices seem to be sticking,” chief financial officer Gregory Hayes told investors on an April 20 conference call.
    Inflation Tolerance

    How many companies follow suit depends in part on whether consumers and executives believe the Fed will allow inflation to continue.

    One measure of such expectations, the Thomson Reuters/University of Michigan Surveys of Consumers, showed respondents in April expected prices to rise 4.6 percent over a year, the same as in March and the highest reading since August 2008.

    “The Michigan measure appears to reflect expectations of food and gasoline price increases to a much larger extent than is suggested by their share in household expenditures and in measures of overall inflation such as the consumer price index,” Topa and colleagues wrote in their April 18 blog. Food and gasoline account for about one fifth of the CPI.

    Richard Curtin, Director of Reuters/University of Michigan Surveys of Consumers, defended its results.
    ‘Alleged Bias’

    “Despite the alleged bias, this inflation expectation series has been repeatedly found to forecast the year ahead inflation rate with an accuracy on par with professional economists,” Curtin said in an e-mail.

    The University of Michigan’s survey asks about “prices in general.” In a separate survey, New York Fed-RAND researchers asked about the outlook for the “rate of inflation.”

    Respondents in the New York Fed-RAND survey “tended to think less about a few salient price changes specific to their own experiences and more about price changes across a broader set of items,” Simon Potter, co-head of the New York Fed’s research and statistics group, said in a March 30 speech.

    New York Fed-RAND surveys also show that when households in February were asked about year-ahead changes for “prices in general,” the median response was 3.8 percent, up from 2.4 percent in September, a gain of more than a percentage point.

    By contrast, the “rate of inflation” question produced a median expectation of 3.2 percent inflation over the next year compared with 2.5 percent in September.
    Validate Prices

    Miller, the Illinois homebuilder, said people in his community of about 186,000 in Peoria County, many of whom work in manufacturing, probably won’t increase spending and validate higher prices.

    Caterpillar Inc. (CAT), for example, which has about 16,000 employees in the Peoria region, reached its corporate goals for incentive pay in 2010, and qualifying employees received checks in March. There was no incentive pay in 2009.

    Caterpillar employees he knows “are not going out and spending that money,” Miller said. “When they get that bonus they are either socking it away for the next time, or they are paying down debt.”

    To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomgerg.net.

    To contact the editors responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net
  2. Tsing Tao

    Tsing Tao

    it was a good article. unfortunately, bernanke is wrong.

    i agree that wage inflation isn't coming any time soon, but it IS possible to have inflation in the products you need, and disinflation in the products you own (or deflation). it has happened before.

    when food and energy represents some 30-60% of a given household budget, and you exclude food and energy from your calculations, then your calculations are made in fantasy land. food and energy are being driven by a collapsing dollar (through the advent of easy, cheap, free flowing Fed fiat dollars) and speculation. this speculation is occurring because people are hedging what they know to be true (and the fed wont admit) and that is rising commodities will filter through to input costs for companies, margin squeezing, and eventually pass-through prices.

    i am speaking from the standpoint of knowledge here. i work for a large consumer packaged goods company. we make over 50 different brands you would find in your grocery store - well known brands. for the last year and a half (prior to january) the increased costs we were receiving in proteins, corn, wheat, cocoa, etc., were being eaten by us. around january, kraft (who is one of our competitors) broke ranks and finally announced a price increase to all national grocery and club outlets. they could no longer stifle the margin compression, and in truth, neither could we. what happened next? every major manufacturer took price in the next 30 days. since that time, we've taken price THREE times on various products.

    IRI data shows that approximatey 75-80% of the grocery store has increased in price since JANUARY, and the average increase (either through price or size reduction) is 12%. that's the highest average price increase in a 5 month period in the modern history of consumer products. i'm not making this shit up.

    and just so you understand, in the history of price increases in the food packaged goods industry, i cannot think of a time when anyone lowered a price of a previous price increase. they've used trade to make temporary price reductions (TPRs) and even to effect list price. but it's never been reversed. so these raises are here to stay.

    when 30-60% of a consumer's spending is tied to food and energy, you CAN have inflation even if those consumers aren't seeing rising wages.

    and that is precisely what we're getting, and why your posted article is incorrect.

    and why bernanke is at fault.
  3. I don't know why so many people on here can't comprehend exactly what you posted above. There is the endless (going on years now) disconnect about demand driven inflation versus currency debasement type of inflation. It's the same reason why all these guys who have argued that jumping into real estate as a hedge against potential runaway inflation have been mostly wrong (granted there are geographical pockets of appreciation).

    As someone noted the other day, this very perverse sort of inflation that we are currently experiencing will be another drain on the economy as the consumer will progressively move ever further towards "lock down" mode as his/her insurance, property taxes, food costs and transportation costs go skyward. Even worse if Joe and Jane Doe have a kid to send to private school or college, especially with no equity in their houses to leverage off of.

    It's just more of the "rob Peter to pay Paul" idealogy that drives this monetary madness. We continue to sacrifice our almighty currency to try to assuage the collapse of the shadow banking system and all of its fallout.
  4. So basiically, most of the real wealth ends up in the hands of Corps. and the financial system. Pretty good plan - for them.
  5. Tsing Tao

    Tsing Tao


    and the Peter in your rob peter to pay paul in this case is first and foremost the elderly - trying to rely on fixed income and savings. in this environment, their savings get zilch and they get no SS raises (because the government claims no inflation). yet they are subject to all these increases.

    bernanke and ilk are nothing less than criminal.
  6. http://finance.yahoo.com/news/Kimbe...2.html?x=0&sec=topStories&pos=5&asset=&ccode=

    Maybe diaper-type products should be removed from Core CPI along with food & energy. "Pull-Ups training pants and GoodNites youth pants by an average of 3 to 7 percent this summer. It said it would raise prices for Cottonelle and Scott toilet paper by an average of 7 percent."

    But maybe there is a silver lining for Bernanke, Krugman, et. al:
    "adult-care brands like Depend, did better than baby products. Falk said that was due more to a decline in the U.S. birth rate than to anything the company had done." What better way to be able to sit through a 4-hour inflation-denying meeting or press conference without leaving your chair...
  7. And they'll have to rewrite the textbooks after this one is over, just like they did after 1970s stagflation--something that wasn't supposed to happen according to the Keynesians.
  8. olias


    So you can't even concede that removing Food and Oil from core inflation makes a little bit of sense? ...it's not conceivable that those food prices might rise because of a drought (for example) and not because of too much money being printed? that's not even conceivable right? Makes no sense, right? it must be a 'sham'!

    Please, guys. You're not having an honest debate if you want to take that logic. Look at what's going on in the world. You're really gonna sit there and tell me that you can positively attribute rising prices in Crude and crops to Fed policy? come on man.

    Now, is it possible that Fed policy has some effect? of course. I happen to think it has some small effect, but please don't try to come across as if you know that it's all because of Bernanke. It really looks foolish.
  9. You are completely full of shit.
    #10     Apr 27, 2011