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    USA: PPI against raising rates

    Some members of the Federal Reserve keep insisting in their speeches that the a rate hike at the June FOMC meeting is still relevant. But apparently, yesterday’s publication of the US final PPI index has completely erased this possibility.

    PPI index reflects price dynamics of the US produced goods and services, including energy, food and transportation services, regardless of who acts as consumers – people, business, or government agencies. As indicated by yesterday’s report, the index fell from 109.7 to 109.3 points in April, i.e by 0.4%, although forecasts expected it to grow by 0.1%. The April decline has taken the index down to its lowest level in eighteen months (see. Chart). The PPI has been keeping the downtrend since October last year.

    united-states-producer-prices15-5-15

    Although the Fed doesn’t consider PPI the main indicator of inflation, the central bank can’t ignore this dynamics anyway. At the end of last year the Fed warned that it would closely monitor inflation expectations and indicators of price dynamics, in order to ensure that inflation does not slow down too much. This year, according to the results of the FOMC meeting in March, it was announced that the Fed will decide to increase rates only when it makes sure that annual inflation reached its 2% target level.

    Yesterday’s report does not promote such certainty as negative inflation at the producer level usually entails consumer inflation, maintaining which is at the target level is a direct responsibility of the central bank. Low inflation is often a symptom of a fundamental weakness of final demand and economy in general, while moderate price growth is a sign of healthy economic growth.

    The Fed doves, such as Minneapolis Fed president Narayana Kocherlakota, have now gotten one more argument to support their idea to maintain interest rates at current levels until 2016. And although to implement this idea they will have to win a lot of “battles”, they seem to have won at least the June one.

     

    Dear traders, please post your comments to our forecasts and share your own opinion. Your ideas can be very helpful for the newcomers in the forex market. Thank you!

    Some members of the Federal Reserve keep insisting in their speeches that the a rate hike at the June FOMC meeting is still relevant. But apparently, yesterday’s publication of the US final PPI index has completely erased this possibility.

    PPI index reflects price dynamics of the US produced goods and services, including energy, food and transportation services, regardless of who acts as consumers – people, business, or government agencies. As indicated by yesterday’s report, the index fell from 109.7 to 109.3 points in April, i.e by 0.4%, although forecasts expected it to grow by 0.1%. The April decline has taken the index down to its lowest level in eighteen months (see. Chart). The PPI has been keeping the downtrend since October last year.

    united-states-producer-prices15-5-15

    Although the Fed doesn’t consider PPI the main indicator of inflation, the central bank can’t ignore this dynamics anyway. At the end of last year the Fed warned that it would closely monitor inflation expectations and indicators of price dynamics, in order to ensure that inflation does not slow down too much. This year, according to the results of the FOMC meeting in March, it was announced that the Fed will decide to increase rates only when it makes sure that annual inflation reached its 2% target level.

    Yesterday’s report does not promote such certainty as negative inflation at the producer level usually entails consumer inflation, maintaining which is at the target level is a direct responsibility of the central bank. Low inflation is often a symptom of a fundamental weakness of final demand and economy in general, while moderate price growth is a sign of healthy economic growth.

    The Fed doves, such as Minneapolis Fed president Narayana Kocherlakota, have now gotten one more argument to support their idea to maintain interest rates at current levels until 2016. And although to implement this idea they will have to win a lot of “battles”, they seem to have won at least the June one.

     

    Dear traders, please post your comments to our forecasts and share your own opinion. Your ideas can be very helpful for the newcomers in the forex market. Thank you!


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