Fed’s Inflation Indicator Rises at 11-Year Pace

(Headlines - scroll down for full stories)
1. Fed's Inflation Indicator Rises at 11-Year Pace
2. Will OPEC Members Voluntarily Cut Production?
3. Fed's Poole Weighs in on Rate Debate
4. India Economy Grew 8.9% in Latest Quarter

1. Fed's Inflation Indicator Rises at 11-Year Pace

The Federal Reserve's preferred inflation indicator, the core personal consumption expenditure price index, is rising at the fastest pace since January 1995. The report could force the Fed to take a second look at its current policy of holding rates steady.

Core PCE, which measures prices paid by consumers for goods excluding food and energy, inched up 0.2 percent in August from the prior month, boosting the annual rate of inflation to an 11-year high of 2.5 percent, according to the Commerce Department.

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Core PCE, known as one of the primary inflation gauges used by the Fed, is well above the Fed's stated comfort range of a 1-2 percent inflation rate.

So will the Fed take action to stave off inflation by raising interest rates? Maybe not.

The Commerce Department's report also shows clear signs of a slowing economy. Income growth and consumer spending both slowed in August.

"Fed officials will continue to worry about inflation pressures, though, ultimately, the main driver of Fed action in coming months will be whether the economy continues to grow at a below-trend rate," Michelle Girard, an economist for RBS Greenwich Capital, tells Marketwatch.

Personal incomes grew just 0.3 percent in August, down from a 0.5 percent increase in July. It's also the weakest income growth since last November.

Consumer spending rose just 0.1 percent in August, also the slowest increase since November. When adjusted for inflation consumer spending fell 0.1 percent, the first decline since September 2005, a month when consumers were dealing with the fallout from Hurricane Katrina.

The savings rate, which subtracts spending from incomes, was negative 0.5 percent. That's an improvement over last month's negative 0.7 percent, but still the 17th consecutive time that America's savings rate is in negative territory.

A negative savings rate means that Americans are dipping into their savings to finance their spending. During the housing boom, homeowners could tap their home equity for cash, but now that the boom has busted, it's not an option for most homeowners.

The AP says, "The new report underscored how much the economy is slowing this year as consumers have been battered by record-high gasoline prices and a cooling housing market. Falling home prices are making Americans more cautious about spending money because they feel less wealthy."

Editor's Note:

Inflation is even higher than the government reports. To read more about the government's manipulation of inflation data, check out our report, "The Inflation Lie." Go here now.

2. Will OPEC Members Voluntarily Cut Production?

OPEC member Nigeria announced that it would cut oil production by 5 percent beginning October 1. OPEC's acting secretary general says that the cuts are being made on a "voluntary basis" at this time. So will other OPEC members follow Nigeria's lead?

Reuters is reporting that OPEC's acting Secretary General Mohammed Barkindo told the news service that other OPEC members are planning to cut production.

But there is speculation that Nigeria is cutting production of its own volition. An OPEC spokesman tells Reuters, "Nigeria has said clearly it is cutting by 5 percent, but it appears this is a unilateral act." And when told that the Secretary General said others would follow, the spokesman said, "I haven't seen anything like that yet."

Nigeria is the OPEC's sixth biggest oil exporter, pumping 2.2 million barrels per day in August. Nigeria is also the U.S.' fifth most important oil supplier based on year-to-date imports, according to Bloomberg. The price of oil shot up after Nigeria's announcement, but has settled back down.

"Nigeria is sending a signal that doesn't appear to be a fully coordinated move with OPEC and the market is trying to work out what that means," said Mike Wittner of Calyon investment bank to Reuters.

OPEC voted to keep their output target steady when they met on Sept. 11, even as oil prices were falling. But according to Bloomberg, oil ministers from Nigeria, Iran, and Algeria each said they were concerned about falling prices.

But Saudi Arabia, the world's biggest oil exporter, holds the most clout when it comes to OPEC. Saudi Arabia's oil minister has said that oil "prices are still at a good level."

Mordechai Abir, director of energy research at Burnham Securities, tells Bloomberg, "A cut by OPEC depends on the Saudi position once WTI's (West Texas Intermediate crude oil) current-month price approaches the mid-$50s a barrel. To the best of my knowledge, this would still provide Riyadh with sufficient revenue."

Abir predicts that oil will fall into the $50s because of the lack of hurricanes, the diffusion of the Iran nuclear issue, and supply is edging out demand.

This could also be a ploy by OPEC to prop up the price of oil, which has fallen more than 20 percent in recent weeks, say some analysts. "OPEC has made some hawkish comments over the last week, which shows a commitment by them to protect the price," said Katherine Spector, an energy strategist at JPMorgan Chase & Co., to Bloomberg.

OPEC announced today that it would not move up its December meeting in Abuja, Nigeria. "There is no plan for an OPEC meeting before Abuja unless the market warrants it," an OPEC official informs Reuters. "Consultations on the market are continuing and will continue to take place."

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3. Fed's Poole Weighs in on Rate Debate

Yesterday, MoneyNews reported that Federal Reserve officials Thomas Hoenig and Jeffrey Lacker commented about the direction of interest rates. Today, St. Louis Federal Reserve Bank President William Poole weighs in.

"If inflation pressures are easing, even if only gradually, and there is a genuine prospect that inflation will return to the comfort zone, then I see no reason to accelerate the decline in inflation by maintaining a restrictive policy in the face of declining employment," Poole told an audience at Middle Tennessee State University.

"Policy needs to be as disciplined as necessary to get the job done, but not more so," he said.

"If it appears that the economy is falling below the baseline forecast path, then my bias will be in the direction of wanting to be sure that the data paint a consistent picture before I advocate a policy easing," the St. Louis Fed chief said. "But if the picture is consistent, and inflation risk is receding, then I will not hesitate to advocate policy easing."

"With long-run inflation contained, the FOMC has flexibility to respond, vigorously if necessary, to economic weakness should it arise," said Poole.

Though generally considered a hawk, Poole seems to be echoing remarks made by dove Hoenig. Yesterday, Hoenig said that he believes the economy will continue to grow below trend, inferring that a rate cut may be needed. Like Hoenig, Poole will also become a voting member of the Fed next year. In fact, he may get a vote as early as next month if the Atlanta Fed doesn't have a new president in place, reports Reuters.

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4. India Economy Grew 8.9% in Latest Quarter

India's economy grew 8.9 percent in the April-June quarter from a year ago, fueled by exports and strong domestic demand, the government said Friday. The expansion was faster than expected.

The increase was faster than the previous quarter, when the economy grew 8.5 percent. Most analysts had projected the growth rate would remain the same in the April-June period, the first quarter of the current fiscal year.

The services sector, which accounts for over half of gross domestic product, grew 13.2 percent in the quarter, while manufactured output rose 11.3 percent, driven mostly by a surge in exports.

Agriculture grew 3.4 percent, unchanged from the growth it recorded in the same quarter last year.

The first quarter numbers prompted analysts to review their forecasts for the full fiscal year ending in March 2007, even though many expect the pace of expansion to moderate in the coming quarters.

"Growth is likely to moderate slightly over the remainder of 2006-07 owing to higher local interest rates and moderation in external demand," said Rajeev Malik, an economist with JP Morgan & Co. based in Singapore.

"Still, the stronger-than-expected GDP for April-June will likely prompt us to revise up our full-year growth forecast to closer to 8 percent from 7.5 percent," he said.

If India can muster 8 percent growth this year, that would be the fourth straight year it has reached that benchmark, making it one of Asia's fastest-growing economies after China, which is surging ahead at more than 10 percent a year.

New Delhi-based credit rating agency Crisil Ltd. said it was also considering revising its forecasts upward.

The monsoon rains, which are crucial to a good harvest in this country with poor irrigation facilities, have been good and that is likely to sustain the growth momentum through the quarter, said Sunil Sinha, a senior economist at Crisil.

The economy's brisk expansion is also likely to encourage the central bank to further increase interest rates to rein in inflation without risking growth. The Reserve Bank of India is scheduled to unveil its biannual credit policy on Oct. 31.

Although rising middle class incomes have helped in keeping domestic demand robust, these have also fueled inflation, which has already been on the rise because of a surge in global oil prices. India imports three-fourths of the crude oil it processes.

Earlier this year, the central bank raised short-term rates twice in a bid to keep inflation under control.

Crisil's Sinha said the central bank likely remains concerned over the volatile oil prices and that the faster-than-expected growth in the April-June period gives it "enough comfort" to consider increasing interest rates.

"The RBI doesn't appear to be saying the rate hike cycle has come to an end," Sinha said.

Editor's Note:

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Editor's Notes:

Inflation is even higher than the government reports. To read more about the government's manipulation of inflation data, check out our report, "The Inflation Lie." Go here now.
Hedge Fund Investing's energy recommendations have pocketed gains of up to 198%. Go here now.
Sidestep a slumping economy. Discover how to invest in sectors the smart way. Go here now.
Find out what our inside contact at a major Swiss bank tells us about investing in India. Go here now.
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