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Inflation? Deflation? Employment Stalls, Markets Sleep Before FOMC

Posted by Joseph Trevisani on Oct 30, 2013 11:44:00 AM

The cost of living in the U.S. rose modestly last month as forecast but the yearly rate has dropped to levels not seen in the past thirty years except in recessions.

Private employers added the fewest number of positions to their payrolls in October in six months. Weak labor markets and low inflation will keep the Federal Reserve firmly in the dovish nest this afternoon.

The consumer price index gained 0.2 percent in September as in the previous month, and the core rate, excluding food and energy costs, fell to 0.1 percent, the lowest since April, according to the Bureau of Labor Statistics.

ADP, the private payroll company reported 130,000 additions to its rolls in October, less than the150, 000 median forecast in the Bloomberg survey of economists. The previous month's total was revised down to 145,000 from 166,000.

The pace of ADP payroll growth has been uneven over the past three years with a downward tilt since January. In 2011 the firm saw an average monthly addition to payrolls of 208,000. This slipped to 163,000 in 2012, but rose again to 176,000 in the first three month of this year. In the second quarter of 2013 expansion slipped to 152,000 where it remained in the third.

Yearly inflation has been declining since reaching a post-recession peak of 3.9 percent in September 2011. In the first half of 2012 annual inflation averaged 2.4 percent each month, in the second half of that year it fell to 1.8 percent. In the first quarter of this year inflation was 1.7 percent a month, in the second it was 1.4 percent and in the third it rose to 1.6 percent.

Core inflation has a similar track though displaced to later in the recovery. Its peak was 2.3 percent in April 2012, followed by 2.0 percent in the third quarter and 1.9 percent in the fourth quarter of last year.  So far this year we have had 1.9 percent in the first three months, 1.7 percent in the second quarter and third quarters.

For the Bernanke led Fed and no doubt for the Yellen Fed as well,  low and receding inflation is a  two-fold imperative for the continuation of the current Treasury and MBS purchase program, that is quantitative easing,  of $85 billion a month.

First, with inflation so low, there is little danger of the flood of new dollars pumping up prices. The Fed assertion that without rising demand there can be no inflation is an empirical fact.

Second, when contemplating the massive amount of dollar creation over the past several years, even the current slowly ebbing price increases are disconcerting.

Economists have long maintained that deflation, though exceedingly damaging to an economy if unchecked, can be easily cured if the central bank prints money.

The slide in inflation and core inflation over the past year despite the trillion dollars a year in quantitative easing must be making the Bernanke/Yellen Fed just a bit apprehensive.  Are they beginning to think, if this doesn’t work what will?

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

ScreenHunter 2001 Oct. 30 13.53

ScreenHunter 2002 Oct. 30 13.55

ScreenHunter 2003 Oct. 30 13.56


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