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The rate of inflation in the United States slowed slightly in August, when a rise in food prices was tempered by easing prices for gasoline and automobiles, according to government statistics released Thursday.

The Labor Department said the Consumer Price Index rose 0.4 percent last month, a slight deceleration compared with the 0.5 percent rise in July. The index, although it reflects just one month of data, is a closely watched indicator that guides analysts in assessing the economy. Other reports released Thursday showed weakness in the jobs market and an uncertain outlook for manufacturing.

“The story is very much the same: that economic growth is slow,” said Kurt J. Rankin, economist for PNC Bank, about the day’s data.

The inflation figures for August reflected the volatility in prices for items such as food and energy. Prices for gasoline moderated, with a 1.9 percent rise in August after a 4.7 percent jump in July. Food prices rose 0.5 percent compared with 0.4 percent in July.

When those components were stripped from the index, the core C.P.I. showed that prices rose in August at the same rate as in July, 0.2 percent. That was in line with analysts’ forecasts in a survey compiled by Bloomberg News.

On a year-over-year basis, the core C.P.I. was up 2 percent in August compared with 1.8 percent in July.

Paul Ballew, a former Federal Reserve economist and now chief economist at Nationwide, said that the August C.P.I. number was consistent with expectations set earlier by such things as automobile prices, which were basically flat in August.

“Those pockets of weakness were in areas already expected and known,” he said.

Of more importance to investors were events in the European debt crisis and speculation as to what Federal Reserve policy makers would say after a meeting next week, Mr. Ballew said. Although the chairman of the Fed, Ben S. Bernanke, has given no sign that there would be fresh stimulus measures, market watchers were weighing the possibility of any measures that would promote the economic recovery in the United States.

With the year-over-year core C.P.I. at 2 percent, it was bumping up against the top limit of the Fed’s unofficial target rate. But the Fed also relies on another closely watched measure of inflation, the price index for personal consumption expenditures, which was up 1.6 percent in the 12 months that ended in July, the latest government data shows.

“It definitely gives him room under the ceiling, if they want to ease policy,” said Kevin Logan, senior economist at HSBC. One such move would be for the Fed to shift bonds in its portfolio to bring down longer-term interest rates. But the central bank cannot raise rates, Mr. Rankin of PNC Bank said, because it would slow economic activity.

In addition, the latest figures show that inflation is set to outpace wage growth, which would be a “significant blow” to potential economic growth because 70 percent of the economy is based on consumer spending, Mr. Rankin said.

“Even those with jobs are not able to put that money back into the economy in a way that would create jobs,” he said. “Now we are getting to the point with this inflation number, even those with jobs are less capable of driving economic activity.”

Steve Blitz, the senior economist for ITG Investment Research, also said that the latest data did not add any impetus to notions that the Fed would respond with policy action at its meeting on Sept. 20-21.

“I think because of the headline number and all of the conservative politics behind it, this certainly does not give Bernanke any cover towards doing anything big,” Mr. Blitz said. “The only thing that is going to give him the cover is what is going on in Europe.”

Mr. Blitz said the C.P.I. data reflected more of a shift in prices rather than inflation, because there was no accompanying rise in wages, and some elements of the data suggest the possibility of future economic activity in specific sectors as capital is directed more efficiently.

For example, rents are a factor pushing the index higher, Mr. Blitz said, but that could be positive for the economy if it continues because it can spur construction in multifamily homes and rental housing.

In addition, a weaker dollar is also pushing up the C.P.I., which means imported goods are more expensive. Domestic producers might see an opening to compete with imported products.

“Here what you have is an interesting mix of price signals that could very well help growth going forward,” Mr. Blitz said.

A weekly report from the Labor Department showed that for the second consecutive week, initial claims for jobless benefits rose, increasing by 11,000 in the week ended Sept. 10 to 428,000. That was up from the previous week’s 417,000, which was revised up from 414,000.

Economists generally take any level over 400,000 as a continued sign of weakness in the labor market.

In addition, the Federal Reserve reported that industrial production increased 0.2 percent in August after having advanced 0.9 percent in July.

Total industrial production for August was 3.4 percent above its level of a year ago, the Fed said.

Inflation Slowed in August, Reflecting a Weak Economy,
NYT,
15.9.2011,
https://www.nytimes.com/2011/09/16/
business/economy/consumer-inflation-higher-than-expected.html

Americans to Fed:

prices are too high

Thu Apr 7, 2011
6:38pm EDT
NEW YORK
Reuters
By Daniel Trotta

NEW YORK (Reuters) - On the streets of America, the debate over inflation is over. Prices are too high and rising too fast, many people say.

"The government says inflation is low, but that's not what I'm seeing at the grocery story," Jorge Alberto, an 88-year-old retiree in Miami, said walking out of a supermarket. "My pension is being put to the test."

Policy-makers at the U.S. Federal Reserve largely agree that promoting economic growth is still more urgent that constraining a nascent pick-up in consumer prices.

They look beyond the volatile fuel and food prices that have pushed up inflation and focus instead on data showing little if any upward rise in wages, something they would see as the seed of a sustained and broad-based rise in prices.

"I don't think the Federal Reserve has a clue about us little people," said J. McKeever, an instructor at the Montessori Institute of Milwaukee.

"I am very frugal, so I watch what I spend. And what I have noticed in recent months is that I have less money before than I used to, while making the same amount of money and having to pay for health care," she said.

Across the country, Americans tell of a disconnect between the real economy they live in and the macroeconomic picture as described by economic indicators.

Consumer prices rose 0.5 percent in February from January, and 2.1 percent over the previous year but the rates were half that when stripping out food and energy.

"There are no salary increases and you know you have the pressure at work to cut, but on a personal level everything else keeps going up. You never seem to be able to catch up," said Paty Peterson, 50, of suburban San Francisco.

Policy-makers at the Fed must weigh how much the perception of inflation might trigger actual price increases. The worry would be if businesses pushed up prices to cover their rising costs and workers in turn demanded higher wages to cover theirs -- which could spark a self-feeding cycle.

Consumers' inflation expectations rose briskly in March, according to the Thomson Reuters-University of Michigan survey.

U.S. households are facing higher prices for staple products such as Tide laundry detergent and Hershey chocolate bars as cocoa, sugar, oil, wheat, corn and other commodity prices climb.

Major consumer products makers have said in recent weeks that they will be raising prices including Procter & Gamble Co (PG.N: Quote, Profile, Research, Stock Buzz), which said it would raise laundry detergent prices 4.5 percent in June. Kimberly-Clark Corp (KMB.N: Quote, Profile, Research, Stock Buzz) is raising prices on diapers, baby wipes and toilet paper as much as 7 percent.

"My grocery bill is up 30 percent over last year," said Cheryl Holbrook, 47, who educates her seven children at home in Mobile, Alabama. "We have to pinch every little penny and make it squeak."

The Fed's hawks, who stress the risks of inflation, have stepped up their argument that it may be time to wind down the central bank's $2.3 trillion securities-buying program to stimulate the economy. So far, they have been out-argued by those who see recovery from the Great Recession as fragile and still in need of a boost.

The European Central Bank, by contrast, on Thursday raised interest rates for the first time since 2008 to contain rising prices.

If underlying prices rise, or an inflationary psychology starts to take hold, the Fed could change course.

A recent Reuters poll found long-term expectations for the food and fuel prices that have pushed inflation higher in recent month are on the rise.

Consumers meanwhile complain that food and gasoline consume too much of their income, forcing difficult decisions to stay within budgets.

Eileen Reilly, 72, a retired resident of the Chicago suburb of Geneva, said higher gasoline and food prices have forced her to drive less, buy a cheaper food for her dog Lucky, and stop taking pills for a liver condition she declined to identify.

"My doctor said I could die if I don't take them," Reilly said, rolling her eyes. "I told him that I'm 72 and I'll be dead soon as it is. Besides, it was either the pills or the car and the dog. And I need the car and I love the dog."

(Reporting by Kevin Gray in Miami,

Mark Felsenthal in Washington,

Verna Gates in Birmingham, Alabama,

Nick Carey in Chicago, Brad Dorfman in Chicago,

John Rondy in Waukesha, Wisconsin,

Peter Henderson in San Francisco)

(Writing by Daniel Trotta)

Americans to Fed: prices are too high, R, 7.4.2011,
http://www.reuters.com/article/2011/04/07/
us-usa-economy-inflation-idUSTRE7367BZ20110407 - broken link

Economic View

How a Little Inflation

Could Help a Lot

August 2, 2009
The New York Times
By TYLER COWEN

BECAUSE fiscal stimulus has not yet been a striking success, perhaps it’s time to consider new monetary remedies for the economy.

That is the argument of Prof. Scott Sumner, an economist at Bentley College in Waltham, Mass., who is little known outside academic circles but whose views have been spreading, thanks to his blog, TheMoneyIllusion (blogsandwikis.bentley.edu/themoneyillusion/).

Professor Sumner proposes that the Federal Reserve make a firm commitment to raising expectations of price inflation to 2 to 3 percent annually.

In his view, policy makers in Washington are doing too much with fiscal policy — overspending and running excess deficits — and not doing enough on the monetary side.

While his views are controversial, they are based on some assumptions that are not. It is commonly agreed among economists that deflation brings layoffs and sluggish investment. Yet, energy price shocks aside, we have been seeing downward pressure on prices. Futures markets and Treasury Inflation-Protected Securities — more precisely, the spread between the yield on TIPS and traditional securities — suggest current expectations that inflation will remain well under 1 percent. Economists generally agree that this is not ideal, and Professor Sumner urges the Fed to try especially hard to overcome the deflationary pressures.

But how would the Fed accomplish this feat? This is where his recommendations get interesting.

The Fed has already taken some unconventional monetary measures to stimulate the economy, but they haven’t been entirely effective. Professor Sumner says the central bank needs to take a different approach: it should make a credible commitment to spurring and maintaining a higher level of inflation, promising to use newly created money to buy many kinds of financial assets if necessary. And it should even pay negative interest on bank reserves, as the Swedish central bank has started to do. In essence, negative interest rates are a penalty placed on banks that sit on their money instead of lending it.

Much to the chagrin of Professor Sumner, the Fed has been practicing the opposite policy recently, by paying positive interest on bank reserves — essentially, inducing banks to hoard money.

The Fed’s balance sheet need not swell to accomplish these aims. Once people believe that inflation is coming, they will be willing to spend more money.

In other words, if the Fed announces a sufficient willingness to undergo extreme measures to create price inflation, it may not actually have to do so. Professor Sumner’s views differ from the monetarism of Milton Friedman by emphasizing expectations rather than any particular measure of the money supply.

The Keynesian critique of this remedy is that printing more money won’t stimulate the economy because uncertainty has put us in a “liquidity trap,” which means that the new money will be hoarded rather than spent. Professor Sumner responds that inflating the currency is one step that just about every government or central bank can take. Even if success is not guaranteed, it seems that we ought to be trying harder.

Arguably, we can live with 2 or 3 percent inflation, especially if it stems the drop in employment. Consistently, Professor Sumner argues that the Fed should have been more aggressive with monetary policy in the summer of 2008, before the economy started its downward spiral. Somewhat tongue in cheek, he once wrote on his blog: “Like a broken clock the monetary cranks are right twice a century; 1933, and today.”

It may all sound too simple to be true, but has the status quo been so good as to silence all doubts? Many advocates expected that the $775 billion allocation to fiscal stimulus would be followed rapidly by generous funding for health care and other reforms. But at the moment, the American public, rightly or wrongly, is blanching at higher government spending and higher taxes. In contrast, a Fed stance in favor of mild price inflation need not require higher taxes or larger budget deficits.

While these arguments have not won over the economics profession, neither have they been refuted. Economists like Paul Krugman have suggested that a public Fed policy favoring 2 or 3 percent price inflation isn’t politically realistic in today’s environment. Still, mild inflation might still be a better shot than hoping for a fiscal stimulus that is big enough, rapid enough and ambitious enough to work.

IF there is a flaw in Professor Sumner’s argument, it is that aggregate demand doesn’t always drive business recovery. Circa 2007, for reasons of their own making, various sectors of the economy were in a vulnerable position. These included real estate, the automobile industry and retail sales. Higher price inflation would not have solved their problems, which stemmed from basically flawed business models that depended on rampant credit. Still, a different Fed stance might have limited the secondary fallout from the financial crisis.

Of course, there’s a risk that inflation could get out of hand and rise above 2 or 3 percent. That said, the Fed has battled inflation successfully in the past, and could do so again if necessary.

Professor Sumner has been working for 20 years on what he hopes will be a definitive economic history of the Great Depression. In this manuscript, tentatively titled “The Midas Curse: Gold, Wages, and the Great Depression,” he argues that Sweden in the 1930s made a credible commitment to expansionary monetary policy and had a milder depression as a result.

Professor Sumner’s proposals may not be public policy now. But if there is one thing economists should know, it is that we should not underestimate the power of an idea.