US deflation risk rises

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The release of the July PCE report received very little attention last week – mostly due to the fact that Bernake’s Jackson Hole speech loomed so large.

With Bernanke having made a case for further easing, it is now time to pay attention to the data … not least because the data will have framed Bernanke’s thinking.

The big news was from the PCE deflator. In headline terms, inflation has collapsed. In annualised terms, the July pace of inflation was ~0.1%y/y, and the core (ex food and fuel) measure was ~0.3%y/y (that is, if we had a year of months just like July, headline inflation would be 0.1%y/y, and core inflation ~0.3%y/y).

I regard the best measure of inflation as the 6mma of the trimmed mean PCE delator. The monthly trimmed mean PCE was 0.9%y/y (SAAR), taking the 6mma AR down 30bps to 1.5%y/y.

With a third of the global economy already in recession, US growth sub-trend, and unemployment rising, it’s hard to see inflation accelerating.

I see rising deflation risks – and suspect that the Fed shares this assessment.

The high unemployment rate alone makes the case for further action, and the modest pace of inflation leaves plenty of scope to act … but in the absence of further action, I suspect that rising deflation risks would make their own case toward the end of 2012.


  1. And fiscal policy is contractionary unbelievably.

    You need inflation rising as Keynes ( and Cassle and Hawtrey et al ) pointed out long ago and it rises when economic growth is strong not tepid. the output is declining rapidly unlike at present.

    Bernanke should be the right man with the right background yet he is sooooo disappointing

  2. A recent issue of Prospect (hard copy) covered a reasonably wide-ranging interview with Paul Krugman where Krugman made the case for further easing primarily based on the seemingly intractable unemployment rate. A range of ‘options’ were aired including reference to direct action purchase of equities. Some interesting data on sometimes dramatic variance of the unemployment rate area to area (generally higher in states that had experienced collapse in property markets), the difficulty of targeting stimulatory effects to particular areas and discussion on inflation/deflation impact. Krugman says he thought US would already be in more deflationary territory but felt US the aggregate US wage figure being subject to ‘downward nominal rigidity’ had an effect. Might be worth a look.

    1. is it on line? if so, please post the link. i don’t know the publication.

      I think buying equity is an okay idea in the right circumstances, so long as it’s done via index / ETF purchases.

      1. I completely disagree on buying equities. That’s no good use of public money since that money would go into the pockets of selected private citizens (mostly already wealthy people). Plus there’s no guarantee that it would bring the unemployment rate down.

        It’s just too late guys…. all of this should have been thought about when the real estate bubble was forming. Now it is too late. People mood has changed. That is a warning to Australia too. Monetary policy should not only target inflation, it should also prevent credit bubbles from forming.

        1. I share your concern about the credit allocation aspect, which is why i would limit it to index / ETFs. However there is no getting around the fact that all monetary policy is re-distributive, and that moving stock prices is a pretty direct way of influencing both wealth and consumption. The right circumstances would be dire ones, but it could be the right policy.

          Probably better than nGDP futures determining the money supply.

      2. I think a better solution would be cutting taxes instead. That would benefit everybody in a fairer manner and also stimulate consumption.

        Monetary policy should NOT go past the limits of what monetary policy is set to do. Honestly, Bernanke has done a lot already (some would even argue too much)! and he can not and *should not* replace Congress and the democratic processes.

        If you really need to stimulate consumption, give me a few million dollars and I will gladly spend them for you! ah , ah

      3. Prospect (Krugman issue) unfortunately relevant article not free:

        Re equity purchases Krugman says he “is willing to believe that would really have an impact” – cites The Hong Kong Monetary Authority buying 14% of the Hong Kong Stock Market in 1998.

        Re preference for tax cuts Krugman says “On the tax cuts issue: I think Friedman was right – temporary cuts are going to be largely saved. That means they are not very good counter-cyclical policy. If you can target the funds on people who are likely to be liquidity constrained […} they are more likely to work…Early on, John Taylor (the Stanford U economist) argued that “we need a tax cut and it needs to be permanent or it would be largely saved”. My response was “so you would cut taxes permanently every time the economy turns done – doesn’t this ratchet us down to having no revenues” “.

      4. Tax cuts are saved but earnings from equity purchases spent? Why?

        Small businesses are the back bone of the economy and those need funding not publicly traded companies.

      5. Buying equities directly would be so wrong, I can not even comprehend how someone can propose that. It would create a mega bubble, everyone would know equities prices never go down, even in a recession… it reminds me of something else that was supposed to “never go down”! Compared to doing that, FX intervention is an easy proposition…. and buying ETF would be a blanket put on every company, even the ones that are not competitive. It just does not make sense.

        1. It’s not my first idea, but i am not as allergic to this as i am FX intervention.

          The idea is to move ‘q’ and so spike investment – at the same time as boosting wealth and thereby promoting consumption. This has always been one of the channels through which monetary policy worked, and at least this one is not beggar thy neighbour like FX intervention.

          It is probably more equitable to do a money funded tax cut (or direct deposit into social security accounts) – but it’s an option. I think the point of Woodford’s Jackson Hole paper is that central banks need to take these sort of risks to boost the economy.

          Like all good ideas, it works in a ‘fiscal theory of the price level’ framework as well … :)

          – if the government wants to boost inflation, buying risky assets that are unlikely to pay off will make inflation more probable (as inflation will be required to meet the budget constraint).

      6. We shouldn’t forget that central bankers are mostly operating, unelected, in a democracy, not (yet) in an oligarchy… :)

        1. I agree, legitimacy is extremely important. i would prefer equity purchases which are funded by the fiscal authority for that reason. Actually, i would prefer it did not have to happen!

  3. No mate it isn’t that hard it merely takes guts to do what you know has to be done.

    He hasn’t done anything like he recommended ( and chided) Japan should do.

    I reckon Glen Rudebusch at the San Francisco Fed would be tearing his hair out.

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