May 19, 2010

AND THAT FOCUS IS TOO NARROW...:

The Jobless: Why There's No Inflation: As long as unemployment stays above 9 percent, retailers' pricing power is nil. It's a situation that could last for years (Joshua Zumbrun, 5/13/10, Business Week)

The big factor keeping a lid on inflation is the jobless rate, which has stayed above 9 percent since May 2009. This near-record stretch of joblessness has held down wages and consumption. The Fed's preferred inflation gauge—the core personal consumption expenditures price index, which strips out price hikes in food and energy—rose at an annual rate of 0.6 percent in the first quarter, the slowest pace since records began in 1959, according to the Commerce Dept.

Retailers feel every day how weak their pricing power is. Bentonville (Ark.)-based Wal-Mart Stores (WMT) cut prices on more than 10,000 items after sales at U.S. stores opened at least a year fell 1.6 percent in the fiscal quarter ended Jan. 31. Home Depot (HD), the largest U.S. home improvement retailer, lowered prices in March on flowers, fertilizers, lawn equipment, and outdoor furniture, according to Craig Menear, executive vice-president for merchandising.

Inflation this low can sometimes slip into deflation. A drop in prices effectively boosts the cost of a loan, since a company finds it harder to generate the profit it needs to service its debt. Deflation has gripped Japan for years and proved impossible to stamp out.

The money supply, which grows robustly when banks are lending and consumers are borrowing, also points to declining inflation. The broadest measure of the money supply expanded at an annual rate of just 1.4 percent in the 12 months through April, vs. 8.4 percent a year earlier. That's a clear sign that consumers have switched from borrowing to saving. Says Gabriel Stein, a director at Lombard Street Research in London: "One of the signals of threatening deflation is if money supply grows very slowly." We're not in a deflation zone yet, but economists in the Bloomberg survey predicted inflation of only 1.2 percent this year, vs. 1.54 percent for 2009. All the more evidence, says Feroli, that rate hikes will be a long time coming: "The inflation data continue to look weaker and weaker."


...with jobs fleeing China because wages are too high and most developed economies facing demographic decline.

Posted by Orrin Judd at May 19, 2010 1:31 PM
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