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Inflation to Roar if Political Interference Hinders Fed

Inflation to Roar if Political Interference Hinders Fed

By    |   Friday, 12 April 2019 11:09 AM

U.S. import prices rose 0.6 percent from a month earlier in March, following a revised 1.0 percent gain in February and beating market expectations of 0.4 percent.

Import prices advanced 1.7 percent in the first 3 months of 2019, which was the largest 3-month rise since October 2017, the Labor Department said. Prices didn't change over the last 12 months.

U.S. export prices increased 0.7 percent from a month earlier in March and above market expectations of a 0.1 percent rise and remained unchanged from February while rising 0.6 percent over the past 12 months.

Import prices do hint that exporters to the United States aren't cutting prices to offset some of the tariff increases.

Yes, prices are moving upward.

Overall in the markets, today we have a risk-on day.

The dollar index is weaker at about 96.8190, which is down from yesterday’s close at 97.1770.

Speaking about inflation, over the past 40 years, the main industrial economies have moved from high and unpredictable inflation to low and stable inflation. This move has been driven not by technology as technology changes “relative prices," but has no influence on inflation overall.

This move has not been driven by globalization that is only a relative marginal positive for inflation.

The control of inflation can be attributed almost entirely to independent central banks pursuing appropriate policies without political interference. The independence of central banks has never been more important.

Quantitative policy is a valuable tool, but it’s also a highly dangerous tool. Quantitative policy works if you know when to end it as well as when to apply it, and non-economists are not necessarily well positioned to make that call.

In this context, appointments to the Federal Reserve are especially important, as BankRate.com recently explained.

That said, the Fed has remained as independent today as it has been under Harry Truman, Lyndon Johnson, Richard Nixon, Ronald Reagan and George H.W. Bush who all have explicitly commented on the direction the Fed’s interest rates.

Yes, the people at the Fed do matter.

In this context, President Donald Trump’s expected nomination of Herman Cain to the Fed appeared in jeopardy after a fourth Republican senator voiced opposition, possibly denying Cain the support needed to be confirmed in the post, Reuters reported.  

Cain was a Republican presidential candidate in 2012. If Cain isn't nominated at the Fed that would likely be well received by markets as Cain isn't generally seen as an independent voice. Cain has also advocated a return to the “gold standard” in the past, which is a little unorthodox in the modern world.

Besides that, on inflation and although U.S. inflation remains quite low at the moment, this week’s U.S. inflation figures expose some of the biases that have driven inflation lower today but that probably will be driving inflation higher later in the year.

By the way, the Bureau for Labor Statistics, which calculates the inflation numbers will apply some “technical” changes to its CPI calculations in 2019 and these changes probably may add to inflation later in the year.

From Europe we got today industrial production for the Euro Area that decreased 0.2 percent from a month earlier in February, which was down from an upwardly revised 1.9 percent rise in January and compared with market expectations of a 0.6 percent fall, which is of course “positive” news when considered in the context of the overall Euro area economic situation.

This week, we have had already production data from the key economies in the Euro area, which have also been generally better than expected. There have also been some very dramatic positive revisions particularly to the German data.

This matters because the drop in developed economies’ manufactory output is almost entirely due to Germany while it must be said that Italy also helped a bit.

Also, overall production has been weakened by low investment spending in the global economy in the wake of trade uncertainty. That uncertainty may not be improving significantly, but it does appear to be at least be stabilizing and production should slowly stabilize as well.

Today, the euro quotes a good bit stronger against the dollar at about USD $1.1318, up from $1.1253 at yesterday’s close. All this doesn’t mean that the euro is set for a free ride up. Think only at the European Parliamentary elections at the end of May and what could happen with the Populists.

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

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The control of inflation can be attributed almost entirely to independent central banks pursuing appropriate policies without political interference. The independence of central banks has never been more important.
political, interference, fed, independence, inflation
Friday, 12 April 2019 11:09 AM
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