COMMODITY TALK: Industrial commodity prices fell to a new 26-month low yesterday owing to a retreat in energy prices. The Journal of Commerce's industrial materials price index, which is closely correlated to both the NAPM and the PPI, fell to 79.84 versus 79.95 on Friday and 80.70 a week earlier. The index has now fallen about four points over the past month and is sharply lower than the 2001 high of 88.37. But while there have been modest declines in many of the JOC's 17 components, most of the decline in the index is the result of the sharp fall in the price of crude oil. Indeed, the Bridge-CRB's raw industrials index is actually higher than where it stood a month ago. The divergence points to disinflation for overall producer prices but steady core prices.
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FED TALK: Fiscal stimulus from tax cuts (in addition to Fed easing) is expected to help the economy rebound from its current weakness, but will tax cuts also bring inflation? It depends, according to the San Francisco Fed's latest Fed letter. "Whether or not the latest round of tax cuts creates inflation depends on people’s beliefs about future fiscal policy decisions," writes visiting scholar Betty Daniel. "If people do not believe that the tax cuts will eventually be offset fully by higher taxes, reductions in government spending, or some combination of the two, then the tax cuts will stimulate demand and raise inflation above what it would have been otherwise." But other shocks, sch as energy prices and weakness in equities, seem "relatively more important than the recent tax cuts in determining current economic activity and Fed policy," Daniel adds. Indeed, inflation expectations are near their lowest levels in weeks, based on the spread between nominal 10-year Treasuries and inflation-indexed 10-year Treasuries. The spread current prices in inflation of about 1.84%, a level not seen regularly since late-April. The spread topped 2% in mid-June |
