Tag Archives: PPI

Michael Pento: Fed Headed into Inflation Overdrive

By Michael Pento, Oct 27, 2015

Seven years of extraordinary fiscal and monetary stimuli are proving ineffective towards achieving the growth and inflation targets laid out by the Federal Reserve. The Consumer Price Index (CPI), the Producer Price Index (PPI) and Gross Domestic Product (GDP) have all failed to grow over 2%. This is because asset prices, at these unjustified and unsustainable levels, need massive and ever increasing amounts of QE (new money creation) to stave off the gravitational forces of deflation. Fittingly, it isn’t much of a mystery that the major U.S. averages have gone nowhere since QE officially ended in October of 2014.
According to the highly accurate Atlanta Fed model, GDP for Q3 will be reported at an annual growth rate of just 0.9%. And things don’t appear to be getting any better for those who erroneously believe growth comes from inflation: September core retail sales fell 0.1%, PPI month over month (M/M) was down 0.5% and year over year (Y/Y) was down 1.1%. CPI was down 0.2% M/M and the Y/Y headline level was unchanged.
While the deflation effect from plummeting oil prices wears off by years-end, there is no reason to believe the same deflationary forces that sent oil and other commodities down to the Great Recession lows won’t start to spill over to the other components, such as housing and apparel, inside the inflation basket. This would especially be true if the Fed continued threatening to raise interest rates and driving the U.S. dollar higher.
Central banks and governments can always produce any monetary environment they desire. It is a fallacy to believe that deflation is harder to fight than inflation. Deflation is currently viewed as harder to fight because the policies needed to create monetary inflation have not yet been fully embraced-although this is changing rapidly.
The Fed just can’t seem to grasp why its newly minted $3.5 trillion since 2008 hasn’t filtered through the economy. But this is simply because debt-disabled consumers were never allowed to deleverage and markets were never allowed to fully clear.
But the Fed isn’t one to let the truth get in the way of its Keynesian story. And why should it? Financial crisis is the mother’s milk of increased central bank power. For example, before the last financial crisis the Fed was unable to buy mortgaged back securities; rules were then changed to allow it to purchase unlimited quantities of distressed mortgage debt. The Fed is perversely empowered to continue making greater mistakes, thus yielding them greater authority over financial institutions and markets.
Since 2008 the rules and regulations fettering Central Banks have become more malleable depending on the level economic distress. Congress has mandated that the Fed can not directly participate in Treasury auctions. But there is no reason to believe in the near future that this law won’t be changed to better accommodate fiscal spending.
Strategies such as: pushing interest rates into negative territory, outlawing cash, and sending electronic credits directly into private bank accounts may appear more palatable in the midst of market distress. The point is that Central Banks and governments can produce either monetary condition of inflation or deflation if the necessary powers have been allocated.
In the Fed’s most recent dot plot (a chart displaying voting member’s expectations of future rates) the Minneapolis Fed’s Kocherlakota was mocked as the outlier for placing his interest rate dot below zero. However, persistent bad economic news has quickly driven the premise of negative rates into the mainstream. Ben Bernanke told Bloomberg Radio that despite having the “courage to act” with counterfeiting trillions of dollars, he thought other unconventional issues (such as negative interest rates) would have adverse effects on money market funds. However, anemic growth in the U.S., Europe and China over the past few years has now changed his mind on the subject.
Supporting this notion, the president of the New York Fed, William Dudley recently told CNBC, “Some of the experiences [in Europe] suggest maybe can we use negative interest rates and the costs aren’t as great as you anticipate.” Indeed, over in Euroland, ECB President Draghi hinted recently that the current 1.1 trillion euro ($1.2 trillion) level of QE would soon be increased, its duration would be extended and deposit rates may be headed further into negative territory.
Statements such as these have me convinced that negative interest rates in the U.S. are likely to be the next desperate move by our Federal Reserve to create growth off the back of inflation. After all, the Fed is overwhelmingly concerned with the increase in the value of the dollar. Keeping pace with other central banks in the currency debasement derby is of paramount importance. Outlawing physical currency and granting Ms. Yellen the ability to directly monetize Treasury debt and assets held by the public outside of the banking system could also be on the menu if negative rates don’t achieve her inflation mandates.
Instead of repenting from the fiscal and monetary excesses that led to the Great Recession the conclusions reached by government are: debt and deficits are too low, asset prices aren’t rising fast enough, Central Banks didn’t force interest rates down low enough or long enough, banks aren’t lending enough, consumers are saving too much and their purchasing power and standard of living isn’t falling fast enough.
The quest of governments to produce perpetually rising asset prices is creating inexorably rising public and private debt levels. The inability to generate inflation and growth targets from the “conventional” channels of interest rate manipulation and the piling up of excess reserves are leading central banks to come up with more desperate measures.
We can see more clearly where Keynesian central bankers are headed by listening to NY Times columnist Paul Krugman’s suggestions for Japan to escape its third recession since 2012. He recently avowed that Japan needs much more aggressive fiscal and monetary stimulus to escape its “liquidity trap” and “too-low” rate of inflation. However, his spurious argument overlooks that the Bank of Japan is already printing 80 trillion yen each year, its Federal Debt is spiraling north of 250% of GDP, and the annual deficits are currently 8% of GDP.
Here it is in his own words: “What Japan needs (and the rest of us may well be following the same path) is really aggressive policy, using fiscal and monetary policy to boost inflation, and setting the target high enough that it’s sustainable. How high should Japan set its inflation target…it’s really, really hard to believe that 2 percent inflation would be high enough.”
You see! According to this revered Keynesian economic expert if what you’ve already done in a big way hasn’t worked all you need to do is much more of the same.
Unfortunately, Krugman and his merry band of arrogant Keynesian haters of free markets represent the conscious of global governments and central bankers. What they indeed are creating is a perfect recipe for massive money supply growth and economic chaos. Therefore, if these strategies are followed, it will inevitably lead to a worldwide inflationary depression. And this is why having a gold allocation in your portfolio is becoming increasingly more necessary.


This article is written by Michael Pento of Pentoport and with his kind permission, Gecko Research has been privileged to publish his work on our website. To find out more about Pentoport, please visit:


China February consumer inflation rebounds, producer deflation intensifies

Reuters, Mar 10, 2015

China’s annual consumer inflation recovered in February, exceeding expectations, but producer prices continued to slide, underscoring deepening weakness in the economy and intensifying pressure on policymakers to find new ways to support growth.

The producer price index (PPI) declined 4.8 percent in February, the National Bureau of Statistics said on Tuesday, extending factory deflation to nearly three years.

China’s statistics bureau attributed the rise in CPI to price rises in vegetables and fruit, while the decline in PPI – which analysts had expected to come in at minus 4.3 percent – was blamed on sliding prices for global commodities, in particular energy, which have undermined profitability at China’s industrial heavyweights.

The risk of deflation is rising for the world’s second-largest economy, as drag from a property market downturn and widespread factory overcapacity is compounded by an uncertain global outlook and falling commodity prices.

Analysts polled by Reuters had expected annual consumer inflation to be 0.9 percent in February, compared with a five-year low of 0.8 percent in January.

Chinese leaders announced last week an economic growth target of around 7 percent for this year, below the 7.5 percent goal that was narrowly missed in 2014.

The consumer price index target was put at around 3 percent for this year. Annual consumer inflation was 2 percent in 2014, well below the government’s target of 3.5 percent.

The People’s Bank of China (PBOC) has cut interest rates twice since November, on top of a reduction in bank reserve requirement ratios (RRR) in February, as regulators show signs of growing concern over lackluster data since the fourth quarter and growing deflationary pressures.

A newspaper owned by the central bank warned last month that China was dangerously close to slipping into deflation, highlighting increasing nervousness in policymaking circles as a sputtering economy struggles to pick up speed, despite a series of stimulus steps.

There could be some distortion caused by the timing of the Lunar New Year as it fell on January 31 in 2014 but fell on Feb 19 this year.


Cheaper crude oil subdues U.S. producer inflation

Reuters, Feb 18, 2015

U.S. producer prices recorded their biggest decline in more than five years in January on plunging energy costs, pointing to very benign inflation in the near term that could argue against raising interest rates.

Other reports on Wednesday suggested the economy was growing moderately early in the first quarter. Housing starts fell last month, while manufacturing output edged higher. “The reports paint a disappointing picture on the U.S. recovery, with the housing starts report in particular reinforcing the narrative that the housing recovery might be in a spot of bother, said Millan Mulraine, deputy chief economist at TD Securities in New York.

The Labor Department said its producer price index for final demand fell 0.8 percent, the biggest drop since the revamped series started in November 2009, after dipping 0.2 percent in December. It was the third straight month of decline in the PPI.

In the 12 months through January, producer prices were unchanged, the weakest year-on-year reading since records started in November 2010, after rising 1.1 percent in December.

Economists had forecast the PPI declining only 0.4 percent last month and gaining 0.3 percent from a year ago.

U.S. Treasury debt prices extended gains on the data. The dollar maintained gains versus a basket of currencies.

Lower energy prices, against the backdrop of softer global demand and increased shale production in the United States, and a strengthening dollar are dampening domestic inflation pressures.

“The weak PPI report adds further evidence of building disinflationary pressures in the U.S., not only in headline prices but also in core prices,” said Mulraine.

While the Federal Reserve, which has a 2 percent inflation target, views the tame price environment as transitory, signs that the energy-driven weakness is leaking to core inflation could cause discomfort among some policymakers.

A key measure of underlying producer price pressures, which excludes food, energy and trade services, fell a record 0.3 percent last month after edging up 0.1 percent in December.

Most economists expect the U.S. central bank to start raising interest rates in June, citing rapidly tightening labor market conditions. The Fed has kept its short-term interest rate near zero since December 2008.

The U.S. economy still faces headwinds created by a stronger dollar and weaker overseas markets, which weigh on exporters. U.S. manufacturing output rose a modest 0.2 percent in January and was flat in December, the Fed said in a separate report.

Wholesale energy prices tumbled a record 10.3 percent in January after sliding 6.2 percent in December. It was the seventh straight month of declines.

Food prices fell 1.1 percent, the largest decline since April 2013, after falling 0.1 percent the prior month. The volatile trade services component, which mostly reflects profit margins, rose 0.5 percent following a similar gain in December.

The Commerce Department said housing starts fell 2.0 percent to a seasonally adjusted annual pace of 1.07 million units in January.

Despite the decline, which was driven by a fall in groundbreaking for single-family projects, starts remained above the one million-unit mark for a fifth straight month. Compared to January last year, groundbreaking was up 18.7 percent.

Sluggish wage growth and a shortage of homes on the market stymied housing last year, even as the broader economy was accelerating.

But a turnaround in housing is expected this year as a rapidly tightening labor market pushes up wages and encourages more young adults to move out of their parents’ basements and set up their own homes.

Already in the fourth quarter, household formation was accelerating, breaking above the one-million mark that usually is associated with a fairly healthy housing market. Although much of the gain in households went into rentals, that would still be a boost to housing starts this year.

Homebuilders such as DR Horton (DHI.N), Lennar Corp (LEN.N) and Pulte Group (PHM.N) are likely to benefit from the anticipated pick-up in starts this year.

In January, permits for future home construction dipped 0.7 percent to a 1.05 million-unit pace. Permits have been above a 1 million-unit pace since July.

Single-family permits fell 3.1 percent last month, while multi-family permits rebounded 3.6 percent.