Reuters blogger Felix Salmon grumbles that the market’s driving him batty, and so he urges us to ignore it, if only for sanity’s sake. “The one thing I’ve learned over the past three years is that the market just isn’t a sensible or rational place,” he writes.
Monthly Archives: March 2011
Manufacturing’s Hot. Will Job Growth Follow?
Manufacturing is on a roll. Today’s update of the ISM Manufacturing Report for February shows that “economic activity in the manufacturing sector expanded in February for the 19th consecutive month.” In fact, the latest rise brings the index to the previous high, set in 2004. The question is when, or if, the revival in manufacturing will spill over into the labor market?
Strategic Briefing | 3.1.2011 | Commodity Inflation
Prospects for the Economy and Monetary Policy
William Dudley, president and CEO, NY Fed | Feb 28
…we need to keep a close watch on how households and businesses respond to commodity price pressures. The key issue here is whether the rise in commodity prices will unduly push up inflation expectations. Although there have been commodity price cycles in the past, commodity prices have not consistently increased relative to other prices, and indeed have declined in relative terms over the very long term. Historically, if commodity prices rose sharply in a given year, it has been reasonable to expect that these prices would stabilize or fall within a year or two. This property has been important because it has meant that measures of current “core” inflation, rather than current headline inflation, have been more reliable in predicting future headline inflation rates.
In contrast, over the past decade, commodity prices generally have been on an upward trend….
Nevertheless, there are important mitigating factors that suggest that it would be unwise for the Federal Reserve to over-react to recent commodity price pressures. First, despite the general uptrend, some of the recent commodity price pressures are likely to be temporary. In particular, much of the most recent rise in food prices is due to a sharp drop in production caused by poor weather rather than a surge in consumption. More typical weather and higher prices should generate a rise in production that should push prices somewhat lower. This is certainly what is anticipated by market participants. Second, even if commodity price pressures were to prove persistent, the U.S. situation differs markedly from that of many other countries. Relative to most other major economies, the U.S. inflation rate is lower and the amount of slack much greater.
Moreover, for the United States, commodities represent a relatively small share of the consumption basket. This small share helps to explain why the pass-through of commodity prices into core measures of inflation has been very low in the United States for several decades.