Tags: hurricane | reconstruction | inflation | consumer | prices | economy

Hurricane Reconstruction May Spark Higher Inflation

Hurricane Reconstruction May Spark Higher Inflation

By    |   Thursday, 14 September 2017 03:33 PM

U.S. consumer price inflation was up 0.4 percent (m/m) in August and higher than the 0.3 percent expectations and the 0.1 percent rise in July.

Year-on-year the numbers are up 1.9 percent in August, up from 1.8 percent expectations and up from 1.7 percent in July.

For the first time since May, core consumer prices did not come in below expectations and hold flat at 1.7 percent

To put that in context, the average consumer price inflation rate of the past 20 years is 2.1 percent year-over-year, therefore 1.9 percent looks to be a pretty normal inflation rate.

Please note the data is for August and so it does not reflect yet the devastation and supply chain disruption brought by the hurricanes Harvey and Irma.

However, the reconstruction work is something that will appear in consumer price inflation over the median-term.

The United States has full employment and labor shortages were already being reported in the construction sector. That suggests price pressures by the housing component of consumer price inflation, but this is something that will not show up immediately.

All by all, the August inflation numbers did not disappoint and they will give the green light for the FOMC to announce at their next week’s meeting the start of the beginning of balance-sheet unwinding.

Over in the U.K., the Bank of England (BoE) today has made no changes to its monetary policy and left the Bank Rate at 0.25 percent while QE purchases of gilts and corporate bonds remain also unchanged at 435 billion- and 10 billion British pounds respectively.

Unemployment is low. Average inflation is about target. So, the BoE has chosen the status quo scenario.

Markets expect the BoE to behave as a central bank that should and look at the trends in the economy. The recent inflation increase jumping to 2.9 percent is considered as temporary. There are concerns about where growth is heading, albeit that the growth data will be revised, which of course would not support any rate hike now.

The irony is that while markets are prepared to judge the Bank of England on median term trends, there is a reluctance to do the same with the Federal Reserve, which on the basis of trend should be raising rates now.

It is almost as if investors want rates to stay low and want just to pick and choose the arguments that best justify their positions.

Besides all that, over in the EU, on Wednesday, Jean-Claude Juncker, the president of the European Commission gave his State of the Union speech to the European parliament outlining “blocks” to prevent “foreign” (Chinese) companies from purchasing European companies.

It’s really interesting that on the same day President Donald Trump blocked the $1.3 billion acquisition of U.S. chipmaker Lattice Semiconductor by a China-backed buyer.

Now, and this is certainly not what the majority of investors recall at present, but all this would be a lot more depressing if it weren’t for the fact that the globalization of capital flows has already collapsed to a mere fraction/percentage, in global GDP terms, of its pre-2008 levels and even remain far below where they were in the early 2000s.

Nevertheless, as a signal, and economists are big believers in signaling effects, this is not a great indication of international cooperation amongst nations, which is worrisome.

Unfortunately, North Korea is again making noise through its state agency “Asia-Pacific Peace Committee,” which handles the country’s external ties and propaganda, that threatened they would use nuclear weapons to “sink” Japan and reduce the United States to “ashes and darkness” for supporting a UN Security Council resolution and sanctions over its latest nuclear test.

Besides that, we just learned that North Korea could be preparing another missile launch in the coming days. A U.S. official, speaking on the condition of anonymity, said intelligence agencies had observed North Korea moving the launcher within the past 48 hours, potentially indicating another looming test.

Finally, and important for investors who have euro-based investments, yesterday, in a prepared speech the ECB’s chief economist Peter Praet renewed his call for a “steady hand” in conducting the ECB’s ultra-easy monetary policy despite a positive growth outlook by stating: “The baseline scenario for inflation going forward remains crucially contingent on very easy financing conditions which, to a large extent, depend on the current accommodative monetary policy stance.”

In simple words: “lower for longer.”

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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The United States has full employment and labor shortages were already being reported in the construction sector. That suggests price pressures by the housing component of consumer price inflation, but this is something that will not show up immediately.
hurricane, reconstruction, inflation, consumer, prices, economy
Thursday, 14 September 2017 03:33 PM
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