U.S. labour market firming, but inflation still benign

[Editor: In India, the RBI has probably done away with the Repo rate hikes. It is to be noted that the Wholesale Price Index (WPI) rose to 7% in October from 6.46% in the previous month, mainly on high prices of manufactured items and food, especially vegetables. Food prices rose by 18.19% in October from 18.4% the previous month, and fuel prices increased to 10.33% from 9.64%. Wholesale vegetable prices increased 78.4%, spurred by a 278% increase in onion prices. However, Non-food inflation, consisting of fibres, oil seeds and minerals, increased to 6.79% from 5.17%. Core inflation, which excludes volatile food and fuel prices, inched up to 2.6% from 2.1% in the previous month.The RBI governor Dr.R Rajan had admitted that food inflation was “worryingly high”, but said he was “somewhat more heartened” by the decline in core consumer price inflation in October, to 8.1% from 8.5% in September. “We will watch the incoming data carefully, especially looking for the effects of the harvest on food prices as well as the second-round effects of fuel price increases and exchange rate depreciation, before we make further decisions on interest rates,” he had said. Dr.Rajan should note that, when "Shock Therapy" is not working since the last couple of years, let him not use the same rule to cool down inflation. Instead he should talk of measures which increases growth and eases supply bottlenecks. When the loans are made hard, then the cost of production already increases, besides bank credits distorts the money supply leading to a complex situation. Also, food price rise cannot be checked by shrinking the money supply--it can only happen through more supply; though I know many monetarists will not agree with me. It is highly debatable whether not allowing proper funds for infrastructure development will have any positive impact on controlling Food Price Inflation]

Fewer than expected Americans filed new claims for unemployment benefits last week and manufacturing activity hit an eight-month high in early November, hinting at some strength in the economy.

While the economy appeared to have momentum early in the fourth quarter, there was no sign of inflation picking up anytime soon. Other data on Thursday showed wholesale prices fell for a second straight month in October.

Initial claims for state unemployment benefits fell 21,000 to a seasonally adjusted 323,000, the Labor Department said. That was better than economists' forecast for a drop to 335,000.

However, a public holiday last Monday could have contributed to some of the drop in applications, even though the department cited no special factors influencing the data.

The four-week moving average for new claims, which irons out week-to-week volatility, fell 6,750 to 338,500. The claims data covered the survey period for November nonfarm payrolls.

While layoffs have slowed significantly to normal levels, there has not been a rapid acceleration in hiring as domestic demand remains lukewarm.

"There is no evidence of a pickup in layoffs and the latest report on claims should be seen as a neutral to slightly positive reading on payroll growth," said John Ryding, chief economist at RDQ Economics in New York.

INFLATION MUTED

Separately, financial data firm Markit said its "flash," or preliminary, U.S. Manufacturing Purchasing Managers Index rose to 54.3, an eight-month high, from 51.8 in October.

Respondents linked the rebound from the one-year low touched last month partly to the end of a partial government shutdown and a rise in demand from domestic and overseas customers.

The claims and the manufacturing reports added to data on nonfarm payrolls and retail sales that have suggested upside momentum in the economy as the year winds down.

Stocks on Wall Street opened higher on the data, while prices for U.S. Treasuries fell. The dollar slipped against a basket of currencies.

Despite the improving growth picture, inflation remains virtually absent. In a second report, the Labor Department said its seasonally adjusted producer price index slipped 0.2 percent last month as gasoline prices tumbled, after dipping 0.1 percent in September.

The decline in prices received by the nation's farms, factories and refineries was the largest since April.

In the 12 months through October, wholesale prices rose 0.3 percent after advancing by the same margin in September.

Wholesale prices excluding volatile food and energy costs rose 0.2 percent after nudging up 0.1 percent in September.

Though labour market conditions will probably determine when the Federal Reserve will start scaling back its massive bond buying program, persistently low inflation suggests the U.S. central bank might not act until March.

"With Europe still in a funk, and China struggling with recovery from a slowdown, there is no spark to get inflation rolling anytime soon and the next up-cycle in commodities will probably be mild," said Michael Montgomery, a U.S. economist at IHS Global Insight in Lexington, Massachusetts.

"There is nothing to signal more than token higher inflation at the consumer level for the next year."

The core PPI was boosted in October by the introduction of new motor vehicle models into the survey. Excluding cars and trucks, the core PPI was up 0.1 percent.

Passenger car prices rose 1.7 percent, the most since October 2009, while light truck prices slipped 0.1 percent.

In the 12 months through October, the so-called core PPI increased 1.4 percent after rising 1.2 percent in September. Last month, wholesale gasoline prices fell 3.8 percent. That accounted for nearly all the decline in the energy index.

Wholesale food prices rose 0.8 percent, boosted by increases in prices for beef and veal, which accounted for nearly 60 percent of the rise.

Record increases in the prices of rolls, muffins, bagels and croissants also lifted food prices in October.

(Reporting by Lucia Mutikani; Additional reporting by Steven C Johnson in New York; Editing by Andrea Ricci)

Courtesy: Reuters