10:03 GMT +307 December 2019
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    Deflationary Pressures Resume in US Economy as Producer Prices Slide

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    The demand side of the US economy unexpectedly weakened in March, even though the broader fundamentals suggest that upward trends are still prevailing, yet, annualized numbers are not strong enough to provide for a breakthrough acceleration of the faltering economy.

    Kristian Rouz – US wholesale prices dropped in March for the first time in seven months, pointing to a likely retreat in factory gate prices and putting downward pressure on US inflation and overall growth. Nonetheless, a broader prices index suggested that inflation is still sustainable, despite the faltering prices in energy and services.

    The dollar’s lingering strength, weak wage inflation, low commodity prices, and sluggish economic growth in the first quarter have all contributed to the retreat in wholesale prices. Even though President Donald Trump reiterated his conviction that the dollar is “too strong,” resulting in a slight decline in the greenback’s FX rate, the macro fundamentals suggest the structural limitations to growth are still intact.

    According to a report by the Labor Department, the US producer price index slid 0.1 percent in March for the first time since August 2016, after having gained 0.3 percent the previous month. However, year-on-year producer prices gained 2.3 percent, their five-year highest, supporting the view of broader accelerating inflation. The monthly dynamics are pointing at a moderation in short-term gains in prices, which might contain economic growth in 2Q17.

    Energy prices dropped 2.9 percent, with petrol costs having declined a whopping 8.3 percent. Oil has advanced in April, however, meaning the disinflationary pressures will ease this month. Broader consumer inflation is currently overshooting the Federal Reserve’s 2-percent target, opening an opportunity for another hike in base borrowing costs, likely due in the summer.

    The retreat in producer prices seems even more puzzling and alarming given the US dollar has dropped 2.8 percent against the basket of its major peers since the beginning of the year. The retreat of the dollar, however, was still not enough to offset the unfavorable international trade trends in the domestic US market. Most US producers are still struggling to compete against cheaper imports.

    The core prices index rose by 1.6 percent year-on-year in March, which is below the Fed’s target. This contradiction in macro fundamentals might render the central bank more cautious when assessing their next policy steps in the coming months.

    Another factor contributing to the slide in producer prices is the deterioration in the credit market situation. Loan services declined by 4.1 percent in March, dragging the overall demand down. Many US households and businesses are overleveraged, which, in the environment of gradual tightening of monetary conditions, limits their spending capabilities.

    Clothing, shoes and accessories; health, beauty and optical goods; truck transportation; securities brokerages, and investment consulting have all moved lower amidst the unfavorable credit conditions. On the contrary, machinery, furnace and parts; insurance services; and food and beverage posted gains in March.

    In material goods, agricultural produce and energy and fuels posted declines in prices, whilst the automotive price index rose 0.9 percent.

    The indication of the inflationary momentum slowing in March is a warning to investors, as the numbers outlined above will be passed on to consumers shortly, affecting the demand-side of the economy in the near term.

    The March numbers have also demonstrated a stabilizing demand for industrial goods, pointing to the ongoing realignment in the economy, which will likely produce a re-industrialization drive in the US. However, the deterioration in the credit market is so bad that even the “full-employment” labor market situation does little to support consumer demand.

    As US jobless claims dropped by 1,000 to 234,000 in the first week of April, the Federal Reserve is taking into account the “full-employment” labor market. The main point of the debate will be whether broader inflation, which is above the targeted 2 percent, becomes the point of reference for upcoming policy decisions, or whether the core prices index, currently at 1.6 percent year-over-year, prevent the Fed from raising rates. 

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    deflation, dollar, economy, United States
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