Consumer Price Index validates PPI and Fed projections on Inflation

Inflation in the United States remains well under control and in line with the Feds’ projections, where it seems that the ongoing economic weakness amid tightened credit conditions and elevated unemployment continue to weigh down on prices, meanwhile, conditions in the U.S. labor market continue to show a slight improvement, however, labor market conditions are still challenging.

The Commerce Department report, Consumer Price index came out flat in the month of February compared with the previous reported rise of 0.2% and below market expectations of 0.1%, while on the yearly scale the index rose by 2.1% compared with the previous 2.6% and the expected 2.3%.

As for the Core CPI; which excludes food and energy prices, the index rose during the same month by 0.1%, in line with market expectations but above the previous drop of 0.1%, in addition the yearly Core CPI rose by 1.3%, compared with the previous reported estimate of 1.6% and the expected 1.4% by markets.

Sub indices showed that Prices excluding food only came out flat compared with the previous 0.2% rise, meanwhile prices excluding energy rose by 0.1% compared with the previous -0.1%. In addition the index showed that energy prices declined by -0.5% compared with the previous rise of 2.8% while services prices rose by 0.1% from -0.2%.

Commodities prices dropped by -0.2% compared with the previous 0.8%, whereas other goods and services remained unchanged at 0.1% rise, Gasoline prices dropped in the month of February by -1.4% compared with previous rise of 4.4%.

Inflation over the short term is still subdued, since the current economic conjecture and weak conditions continue to hammer down prices, not forgetting high unemployment along with tight credit conditions that suffocate spending, thus trimming off growth in the United States, we saw from earlier reports how high unemployment and tight credit conditions hammered down Retail Sales and forced it to decline in the month of February not to mention the near termination of various stimulus measures as announced by the Federal Reserve Bank throughout the last rate decision meeting. But the Fed assured markets that inflation trends remain subdued over the current period along with a stable inflation outlook, thus inflationary threats will not cause any problems at the meantime for the recovery process in the U.S.

The Federal Reserve projected that inflation will not exceed 2.0% over the upcoming two years, but investors are concerned about the effects of the huge liquidity that was pumped into the financial system along with rising oil prices, where both could pressure prices to rise, not to mention the improvement in economic conditions throughout the past period which accompanied by the Feds' projections of falling unemployment will cause spending and demand to pick up by the final part of this year, therefore putting even more pressures on inflation to ascend in an uncontrollable way.

But overall today’s news come to affirm the PPI index that was released yesterday along with the Fed projection thus, today’s trading session might witness the same scenario of yesterday where stocks will most probably profit from these news and continue to rise above their current levels, meanwhile investors will target higher yielding assets and oil, where the Dollar and Gold will witness a drop in trading since the lack of inflationary threats leads investors to target riskier assets and sell gold as it's considered the perfect hedge against inflation, but with no inflation risks rising in at the meantime, thus gold is not needed to hedge against inflation. Noting that the Euro might witness a volatile trading as Greece’s debt problems still continue to affect the ability of the 16-nation currency to rise against its major counterparts.

The U.S. Labor Department released today the weekly jobless claims for the week ending March 13, where jobless claims dropped slightly to 457,000 from the prior reported estimate of 462,000, but was slightly worse than median estimates of 455,000, meanwhile, continuing claims increased in the week ending March 6, to 4.579 million from the prior revised estimate of 4.567 million and also worse than median estimates.

Conditions in the U.S. labor market are still somewhat challenging, though we witnessed a slight improvement over the past few months, where employers eased the pace of layoffs noticeably, however, new hiring remains rather weak, and accordingly, we should expect activity in the labor market to remain volatile for a period of time, before the labor market can reach stability.

Unemployment in the United States is still near its highest levels since 1983, where the unemployment rate stood at 9.7% in February, and it will probably take some time before unemployment can drop over a noticeable rate, and the Feds believe that unemployment will remain above 9 percent throughout this year, before it starts to drop during 2011.

The U.S. economy will continue to stabilize throughout this year, though we should witness stronger economic activity during the second half of this year, since economic activity is still stabilizing in several sectors including the manufacturing, the housing, and the services sectors, while it seems that the labor market is starting to follow the lead of other sectors into stability, however, we should expect the labor market to take its time to reach full stability.

Another report showed that the current account deficit widened during the fourth quarter of 2009 to reach $115.6 billion compared with the prior revised deficit of $102.3 billion, however, the current account deficit was still better than median estimates of $119.00 billion.