Inflationary Data Signal Prices Are Rising, While FOMC Assures Markets over the Outlook for the Economy

This week dear reader was highlighted by inflationary data as well as the Federal Open Market Committee decision on interest rates, moreover, where the consumer price index and the producer price index both signaled that prices rose in November, while the FOMC decided to leave the benchmark interest rates steady, as the US economy is still facing challenges ahead.

The PPI and the CPI both signaled that prices increased in November as energy prices rose and as economic activity continued to recover, though the Feds have been assuring markets that inflation will remain under control, as according to the Feds’ latest projections, inflation will remain below 2% as measured by core PCE over the course of the next three years.

The outlook for inflation remains somehow unclear, where the huge amounts of liquidity that were pumped into the financial system is supposed to lead to an increase in inflation, however, the ongoing economic slack amid rising unemployment, and tightened credit conditions continue to weigh down on prices.

The FOMC signaled at their meeting as they left interest rates unchanged at a record low between 0% and 0.25% that the economy is still weak though consumer spending has been moderating recently, as that was reflected on better economic performance, yet with weak labor market conditions, lower income growth, declining wealth, and tightened credit conditions, the Feds expect the economy to remain weak.

The Feds though expect the economy to continue its gradual recovery, as the worst recession since WWII seems to be coming to an end; however, the Feds are still concerned with elevated unemployment levels, as rising unemployment might stall the recovery through hammering consumer spending which is the cornerstone for growth in the United States.

The Feds also signaled that they will continue to slow down their purchases of mortgage backed securities as well as treasury securities, while the Feds also confirmed that several liquidity programs will end next year, as the recent improvement in financial markets’ conditions indicated that those programs had run their course.

Meanwhile, manufacturing data this week provide mixed signals, though the data also highlighted that the manufacturing sector was still expanding in December, where the empire manufacturing index showed that activity dropped, while the Philadelphia Fed index showed manufacturing data continued to increase.

Industrial production also increased in November to point that the activity in the United States is rising, while capacity utilization which is a measure for how much resources are being used by factories, increased in November inline with the increase in industrial production. The increase in capacity utilization might also signal that inflationary pressures might be picking up since the index is considered to be an inflationary gauge.

Moreover, data from the housing market showed that activity is indeed improving, where the housing starts and the building permits both increased in November. The housing market has been showing signs of stabilization over the past few months, while some areas indeed started to report that activity was increasing amid cheap home values, and the ongoing support from the government through tax credits for first time buyers.

The leading indicators also showed that activity is indeed improving, as the leading indicators signaled that the recovery will prevail over the upcoming period, since the leading indicators index is considered as a gauge for future economic activity in the next 3 to 6 months, and this indeed comes inline with expectations that the US economy will continue to recover gradually from the worst financial crisis since the Great Depression.