Kristian Rouz – US producer prices post a negligible rise in June, despite the broader inflation reading having topped earlier projections. The contradictory data suggests the Federal Reserve could still cut its base borrowing costs, although some economists warn inflation and asset prices could spiral out of control, adding risks to the sustainability of ongoing late-cycle expansion.
According to the US Labor Department Friday, the US producer price index (PPI) rose just 0.1 percent month-on-month in June after a similar increase the previous month. On a yearly basis, the PPI rose 1.7 percent, a slowdown from May's 1.8 percent, and also the slowest increase since January 2017.
The latest reading is also below the Federal Reserve's 2-percent inflation target, which may provide some justification to the central bank's possible interest rate cut.
“We don’t anticipate any significant acceleration in inflation through the remainder of this year,” Ryan Sweet of Moody’s Analytics said. “Therefore, the Fed can cut rates in July and then keep them unchanged through 2020.”
However, officials say the underperforming factory-gate inflation stems from lower energy prices, which is a highly volatile factor. Additionally, overall US inflation actually gained momentum in June, rising 0.3 percent month-on-month, or 2.1 percent from a year prior – riding above the Fed's target.
US June PPI inflation +0.1%mom/flat at +1.7%yoy— Shane Oliver (@ShaneOliverAMP) July 12, 2019
Core PPI inflation +0.3%mom/flat at 2.3%yoy
Both stronger than expected.
Like CPI is more consistent with #Fed cutting by 25bp latter this month rather than 50bp
US money mkt exp for 89bps of cuts next 12 mths still looks excessive pic.twitter.com/mxPYKmS8JH
The Fed's comprehensive mandate is to maintain the stability of prices, maximum employment, and moderate long-term interest rates. This as the Fed's current interest rates stand at around 2.5 percent – which, some economists say, is still very accommodative and below the 'neutral rate', estimated at 2.5-3-percent.
Additionally, US unemployment is at its lowest in decades, at 3.7 percent, while inflation is near the 2-percent target. Economists believe there's no need to cut rates anytime soon – and should the global trade tensions ease, the central bank would actually have to continue raising borrowing costs to prevent asset bubbles and an 'overheating' of the economy.
“His (Fed Chair Jerome Powell's) case for easing is focused almost exclusively on the uncertainty caused by trade negotiations and the resulting drag on business confidence and investment,” Stephen Stanley of Amherst Pierpont Securities said. “I find the case for easing (lower rates) incredibly weak.”
However, US President Donald Trump apparently wants lower rates – and, despite the central bank's formal independence from political pressures, Powell may be inclined to listen.
Strong jobs report, low inflation, and other countries around the world doing anything possible to take advantage of the United States, knowing that our Federal Reserve doesn’t have a clue! They raised rates too soon, too often, & tightened, while others did just the opposite....— Donald J. Trump (@realDonaldTrump) July 6, 2019
In the past, Trump favoured higher rates and a normalisation of US monetary conditions as the only way to start reducing its excessive reliance on debt.
Fed officials insist their closely-watched inflation indicator, the personal consumer expenditures (PCE) price index, is still below the 2-percent target, at 1.6 percent as of May. This, some say, could formally justify a rate cut.
But the effects such a move would have on the broader US economy remain unclear. US stock indices continue to post new record highs, while economic expansion in the non-financial sector remains tepid. In this light, some economists warn of a possible 'asset bubble' forming within the US economy – and a rate cut could make the situation slightly more volatile.
Markets are pricing a 75% chance of rate cuts in the US and an increasing probability of QE.— Daniel Lacalle (@dlacalle_IA) April 24, 2019
A strong and healthy economic recovery does not need further monetary stimuli. The Fed is making a big mistake by fueling the risky asset bubble and not paying attention to the risks. pic.twitter.com/wURI7VmwQW
While economists, market participants, and policymakers continue their debates, the Fed could cut interest rates by as much as 0.5 percent as soon as this month.