Well that was quite a week. The stock market down over 9% in a matter of minutes? Don't see that too often. Certainly not the sign of a healthy financial system that is headed for a normal "recovery" as many want to believe.
The first thing to consider this week is the unemployment numbers. While more jobs were added the unemployment situation in this country is ugly. Here is the story in a quick picture.
From the excellent Calculated Risk
Now many people seem to think that it is impossible to have inflation if there is high unemployment. They argue that you need wage inflation to create inflation. This isn't true. You can have inflation without wage inflation. They call that stagflation. It sucks (see 1970s in the United States).
One person who doesn't fall prey to this idea is actually Jeffrey Lacker, the president of the Richmond Federal Reserve Bank
"My worry is that we will let the obvious slack in the economy lull us into a false sense of security regarding inflation, which could allow inflation pressures to build before we raise rates," Lacker said in a speech to an investment group in Richmond. Lacker said he would be happy if inflation remained about where it is – with the core consumer inflation rate at 1.1%. Lacker said he was troubled by "persistently high" readings on inflation expectations. "They said the possibility that people think the FOMC will be unable or unwilling to conduct monetary policy in a way that keeps inflation from rising significantly during this recovery," Lacker said
For those who say we must keep interest rates low to try to create jobs I would caution that an inflationary environment isn't the friend of the worker. Regardless, the Fed is going to keep rates at zero for a long time. That is a done deal. No point in talking about whether that is a good idea or not. It is reality. My point is that it could lead us to painful inflation.
So, on to this week's inflation news.
Sysco reportedeasing food deflation
US: Sysco Beats Estimates With Q3 Results Food distributor Sysco has reported better-than-expected profit figures for its third quarter, attributing this to the easing of food cost deflation. For the quarter ending 27 March, net profit rose by 9.5% to $247.6m, while sales rose by 2.4% to $8.95bn.
The company said product price deflation was at 0.8% in the quarter, considerably narrowing from the 3.5% deflation it recorded in the second quarter. CEO Bill DeLaney added, "The underlying business environment appears to be improving, as evidenced by both the case volume growth and easing of deflation that we realized as the quarter progressed".
Gallup conducted a poll that showed a majority of Americans were concerned about inflation but the people who were most concerned were those with the lowest income. Again this points to how inflation is bad for the average worker in this or any country.
Although the Federal Open Market Committee said "inflation is likely to be subdued for some time" after its meeting last Wednesday, 55% of Americans in an April 8-11 Gallup poll are "very concerned" inflation will climb, and another 29% are "somewhat concerned." This level of concern about inflation also seems to reflect consumer inflation expectations contradictory to the FOMC’s assertion that "longer-term inflation expectations [are] stable."
A higher percentage of lower-income than of upper-income Americans are "very concerned" about inflation, likely resulting from lower-income families’ tendency to spend a much larger proportion of their income on the basic necessities experiencing the most pronounced price increases — food and energy.
This week the April ISM Non Manufacturing report came out and showed higher prices.
Prices paid by non-manufacturing organizations for purchased materials and services increased in April. ISM’s Non-Manufacturing Prices Index for April registered 64.7 percent, 1.8 percentage points higher than the 62.9 percent reported in March. In April, the percentage of respondents reporting higher prices is 42 percent, the percentage indicating no change in prices paid is 56 percent, and 2 percent of the respondents reported lower prices.
The April ISM Manufacturing report also came out this week and showed all commodities other than natural gas increasing in price.
Commodities Up in Price
Aluminum (10); Aluminum Products; Brass Products; Caustic Soda (2); Copper (2); Copper Products (2); Corrugated Containers (2); Ferro Alloys; Plastics (4); Plastic Resins (4); Polyethylene (3); Polypropylene (5); Polypropylene Resins; Pulp; Sodium Hydroxide; Stainless Steel; Stainless Steel Products; Steel (10); Steel Products (4); and Sulfuric Acid (2).
Now in China they are currently battling inflation. That is what happens when your economy grows at double digits. In the old days this wouldn't really concern the average American. However, since China makes a lot of what we buy, if they let the Yuan appreciate to combat inflation, that means what we buy from them gets more expensive.
China’s producer prices may have climbed the most in 18 months in April on rising costs of imported goods, adding to signs that the country’s fixed exchange rate is stoking inflation.
"For China, the more quickly yuan appreciation kicks in, the better," said Stephen Green, head of China research at Standard Chartered Bank in Shanghai. "Appreciation is needed to absorb higher raw-material import prices, a key driver of China’s producer-price inflation."
Now people will argue that inflation is easy to control, all you have to do is raise rates. Anyone who thinks the current global economy is easy to control should review the stock market this week. We are in uncharted territory. Expect more surprises. India has been raising rates but has an inflation problem. Australia is beginning to see the same.
Stevens said yesterday that inflation, which peaked at 5 percent in 2008, may not slow as much as earlier forecast and "now appears likely to be in the upper half of the target zone over the coming year."
By contrast, the governor predicted three months ago that inflation "would be in line" with its target range. The central bank will publish its latest forecasts for inflation and economic growth on May 7.
"The RBA’s growth and inflation forecasts are clearly in the process of being changed," said Stephen Roberts, a senior economist at Nomura Australia Ltd. in Sydney
If it is easy for Central Banks to control inflation, several of the world's largest economies have already gotten it wrong. Perhaps they didn't go to the right schools?
If you want some real doomy predictions, you can read this John Williams interview.
So once again there are signs of inflation in many of the major world economies as well as the US. The stock market this week scared a lot of people. During that time, gold went up again in price. So what is likely to happen this week? More money will be flowing to bail out Greece (and the banks that have exposure there). Large amounts of money. The money isn't going to workers' wages. But it still has the possibility of creating inflation. And the US will not be raising rates any time soon. One thing seems to be certain, this is going to be a bumpy ride.