Vital Signs: Will Inflation Stay Tame?

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The Federal Reserve keeps mentioning potential inflationary pressures as a reason to raise interest rates. So far, greater capacity utilization in manufacturing, healthy job gains, and higher energy prices are not influencing prices by all that much. The markets will get another update on the inflation front this week, but not much is expected to change.



Consumer and producer price indexes are both expected to have risen by 0.4% in March. On the face of it, monthly gains of that size are not particularly benign. However, a resurgence in gasoline and oil prices should account for a large share of the increases. The national average for a gallon of regular unleaded gas is at $2.68 and oil prices are approaching $69 per barrel again. The median forecasts among economists surveyed by Action Economics are for 0.2% rises in the ex-food and energy categories for both the consumer and producer price indexes.



There is little evidence that elevated energy prices over the past year have filtered through into other areas of the economy. Indeed, higher gasoline prices heading into the summer driving season are more likely to have an impact on consumer demand than on inflation. Paying more at the pump eats into purchases of other goods and services. This erosion of purchasing power could very well factor into the Fed's decision making at its upcoming monetary policy meetings in May and June.



The markets will also get a better idea of how the Fed is already weighing the effects of rising energy prices, strong economic activity, and a softening housing market. The central bank releases its minutes for the Mar. 27-28 monetary policy meeting on Apr. 18.



The Fed is now entering a very tricky time for monetary policymaking. March housing starts data out this week are expected to show further weakening in the housing market. Strong home price gains have helped fuel consumer spending, but as demand wanes prices should also plateau. The central bank has to balance the potential need to raise rates to keep the economy running at a pace that will not stoke inflation with the possible growth-inhibiting effects of higher energy prices and the chance that higher rates could cause a more dramatic slowdown in housing.



Here's the weekly economic calendar.



Monday, Apr. 17





MEETINGS OF NOTE





8:30 a.m. EDT





Federal Reserve Bank of Atlanta President Jack Guynn gives a welcoming speech at a conference sponsored by the International Association of Financial Engineers entitled "Modern Financial Institutions, Financial Markets and Systemic Risk" at the Atlanta Fed Bank.



8:35 a.m. EDT





Federal Reserve Board Vice Chairman Roger Ferguson will give a speech at the "Modern Financial Institutions, Financial Markets and Systemic Risk" conference in Atlanta.



1:15 p.m. EDT





Federal Reserve Bank of Chicago President Michael Moskow gives a speech entitled "Workforce Quality and Public School Reform" at a luncheon in Des Moines, Iowa.



2 p.m. EDT





Federal Reserve Board Governor Randall Kroszner speaks at the "Modern Financial Institutions, Financial Markets and Systemic Risk" conference at the Atlanta Fed Bank.



Empire State Manufacturing Survey







Apr. [fcst]



Mar.



Feb.



Yr. Ago



Business Conditions



24.3*



31.2



21



5.1









8:30 a.m. EDT





The New York Federal Reserve Bank releases its April survey of business conditions for manufacturers in the New York Fed district. The March rise in the general business conditions index was accompanied by improvement in the new orders, shipments, and unfilled orders indexes. What's more, the March report showed that more respondents boosted payrolls and extended hours worked.



The weaker Apr. forecast may be due in part to a generally softer March outlook for the coming six months among the region's manufacturers. Expectations for general conditions did edge up to 39, from 38.4 in February. However, the new orders, shipments and unfilled orders indexes posted modest declines from February levels. Employment-related indexes were also off a bit in March. The index for capital expenditures slipped to a reading of 37.6, from 41.1 in February, but remained comfortably above the long-term average of 23.3.



Home Builders Survey







Mar.



Feb.



Jan.



Yr. Ago



Housing Market Index



55



56



57



70









1 p.m. EDT





The National Association of Home Builders and Wells Fargo bank issue the April survey results. The release updates housing market conditions by measuring builders' assessments of current sales, buyer traffic through model homes, and expected demand. Economists and analysts will be looking at this index to gauge whether the housing market is stabilizing after some cooling off in recent months or is continuing on its downward slide.



The index tracking single-family home sales slipped to 60 in March, from 61 in February and 62 in January. Expectations among builders for sales in the coming six months dipped to 62, from 64 in the previous months. The latest reading for prospective buyer traffic was 39, off a point from 40 in January.



The NAHB believes that the deterioration in the index is related to higher interest rates and a retreat by investors. Higher mortgage rates, now above 6.5%, reduces affordability while fewer investors means less demand for homes.



Tuesday, Apr. 18





MEETINGS OF NOTE





8:30 a.m. EDT





Federal Reserve Bank of San Francisco President Janet Yellen speaks about economic prospects at the Bay Area Council's outlook conference in San Jose, Calif.



12:05 p.m. EDT





Federal Reserve Bank of Chicago President Michael Moskow gives opening remarks at an auto industry conference sponsored by the Chicago Fed Bank in Chicago.



2 p.m. EDT





Federal Reserve Board Governor Kevin Warsh will give opening remarks before a panel discussion on "Financial Innovation, Mark-to-Market Accounting, and Financial Instability" at a financial risk conference held at the Atlanta Federal Reserve Bank in Atlanta.



ICSC-UBS Store Sales







Apr. 8



Apr. 1



Mar. 25



Yr. Ago



Same-Store Sales [weekly % change]



1.8



0



-1.6



70









7:45 a.m. EDT





This weekly tracking of retail sales, compiled by the International Council of Shopping Centers and UBS bank, will update buying activity for the period ending Apr. 15. Sales appeared to bounce back in the latest period ended Apr. 8, after weak weekly figures in March.



New Residential Construction







Mar. [fcst]



Feb.



Jan.



Yr. Ago



Housing Starts [millions, annualized rate]



2.03*



2.12



2.3



1.83









8:30 a.m. EDT





Based on the recent trend in new home sales it would appear that housing starts are set to ease some more. After peaking at a rate of 1.35 million in October, the pace of new home sales slowed to 1.08 million in February. The February sales total was the weakest since May of 2003. As a result, inventories of new homes have surged to 6.3 months. The current level of inventories is now above the long-term average of 5.9 months.



Producer Price Index



Mar. [fcst]



Feb.



Jan.



PPI - Monthly % change



0.4*



-1.4



0.3



PPI - Annual % change



3.4



3.7



5.7



Core PPI- Monthly % change



0.2*



0.3



0.4



Core PPI - Annual % change



1.7



1.7



1.5









8:30 a.m. EDT





Producer prices for finished goods sold by U.S. businesses probably turned higher in March. The drop in February was dominated by lower energy prices. The price index for gasoline fell 11% in February but should show a rebound in March. Compared to the same period a year ago, producer prices slowed to pace of 3.7%, from 5.7% in January. The February yearly gain was the slowest since last June. Excluding food and energy costs, the rise in wholesale prices should remain tame in March.



The volatile energy and metals prices have yet to impact wholesale prices on a broad level, let alone putting pressure on consumer prices. The index tracking crude goods prices was up 26% from a year ago in February and 11.9% even after food and energy was stripped away.



Instinet Redbook Research Store Sales







Apr. 8



Apr. 1



Mar. 25



Same-Store Sales [% change over same period in prior month]



3.1



-3.2



-2.5









8:55 a.m. EDT





This weekly measure of retail activity will report on sales for the second fiscal week of Apr., ended Apr. 15. For the entire month of March store sales were down 3.2% compared to February. The weekly chain store sales figures in March and Apr. are being affected by the Easter holiday. This year, Easter is in mid-Apr., after being celebrated in March last year.



FOMC MINUTES





2 p.m. EDT





The Federal Reserve will release the minutes of the Open Market Committee meeting held on Mar. 28. The post-meeting press release in March was little changed from the January statement, which caught some investors by surprise. Some economists and investors expected the Fed would begin to shift the language in its post-meeting press release to clear the way for an eventual end to its string of rate hikes.



The central bank maintained the view that future monetary policy decisions will rely on economic data and that "possible increases in resource utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures."



Fed watchers expect the central bank will raise rates by another 25 basis points at the May 10 monetary policy meeting. There is less certainty among economists over whether additional tightening will occur at the June and August meetings.



Wednesday, Apr. 19





Mortgage Applications







Apr. 7



Mar. 31



Mar. 24



Yr. Ago



Purchases [index]



417.7



438.2



404.1



446.0



Refinancing [index]



1532.4



1640.8



1558.4



1798.8









7 a.m. EDT





The Mortgage Bankers Association releases its numbers on mortgage application volume for both home buying and refinancing for the week ending Apr. 14. The four-week moving average for the purchase index rose for a third straight period, to 413.4 in the week ended Apr. 7, from 409.7 for the week ended March 31.



The average rate on a conventional 30-year fixed mortgage turned higher according to HSH Associates. For the week ended Apr. 7, the rate hit 6.57%, from 6.51% for the week ended March 31.



The MBA's refi index declined as well which caused the four-week moving average to fall as well. For the week ended Apr. 7, the average was 1576.5, down from 1589.3 for the period ended March 31.



Consumer Price Index







Mar. [fcst]



Feb.



Jan.



CPI- Monthly % change



0.4*



0.1



0.7



CPI - Annual % change



3.5



3.6



4



Core CPI - Monthly % change



0.2*



0.1



0.2



Core CPI - Annural % change



2



2.1



2.1









8:30 a.m. EDT





Consumer prices for all goods and services probably accelerated as energy prices bounced back. In February, energy prices fell 1.2%, following a 5% jump in January. The March level of energy prices could once again heat up as gasoline prices reached a national average of $2.50. The yearly pace of inflation has been decelerating, although that may begin to change if gasoline prices keep moving up as the summer driving season approaches.



Outside of energy, inflation has been focused in the service sector. Indeed, the prices of durable goods have fallen 0.6% over the past twelve months, while the prices of non-energy services are up 2.9% from a year ago.



Consumer prices excluding food and energy have remained mild and steady. The yearly rate of core inflation was 2.1% in February. Over the three-month period of December through February, the annualized pace of growth in core inflation was a slightly smaller 2%. Higher energy prices do not appear to be bleeding into the prices of other goods and services.



Real Earnings







Mar. [fcst]



Feb.



Jan.



Real Earnings [Monthly % change]



-0.2



0



-0.2



[% change year ago]



0



-0.1



-0.4









8:30 a.m. EDT





Inflation-adjusted weekly earnings of production workers probably slipped 0.2% in March. The Labor Dept.'s employment report showed a 0.2% rise in average weekly earnings, while economists expect a 0.3% rise in the March consumer price index. Compared to the same period a year ago, inflation-adjusted earnings was off 0.1% for February.



However, the yearly decline in real wages is waning. In January, the year ago decline was 0.4%. The path of real earnings rests largely on the strength of the labor market is and the trend of energy prices.



Thursday, Apr. 20





MEETINGS OF NOTE





U.S. President George W. Bush hosts Chinese President Hu Jintao at the White House in Washington, D.C.



12:30 p.m. EDT





International Monetary Fund Managing Director Rodrigo de Rato speaks about IMF reform at an Intstitute for International Economics conference in Washington, D.C.



Jobless Claims







Apr. 8



Apr. 1



Mar. 25



Yr. Ago



Initial Claims [thousands]



313



301



304



334









8:30 a.m. EDT





Jobless claims bounced up in the week ended Apr. 8 to 313,000. Readings around 300,000 are a positive sign for hiring levels. The four-week moving average slipped to 307,500 for the week ended Apr. 8. The average for the period ended Apr. 1 eased to 309,000. Continuing jobless claims for the week ended Apr. 1 stood at 2.42 million, from 2.43 million in the previous period.



Leading Indicators



Mar. [fcst]



Feb.



Jan.



Leading Index [Monthly % change]



0.0*



-0.2



0.5



[% change year ago]



2.7



2.0



2.6









10 a.m. EDT





The Conference Board's composite index of leading economic indicators is forecast to have held steady in March. On a yearly basis, the index should bounce back. In January the index stood 2.6% from a year ago, the best pace since February of 2005.



Already for March, the average level of initial claims was up slightly which should weigh on the index, while no change in average weekly hours in manufacturing should have no impact. The Institute for Supply Management's non-manufacturing index of supplier delivery times edged higher in March which should have a positive impact. A modest rise in stock prices over March should also have a positive influence on the index.



Philadelphia Fed Survey



Apr. [fcst]



Mar.



Feb.



Yr. Ago



Business Conditions [index]



14.0*



12.3



15.4



24.6









12 p.m. EDT





The Philadelphia Federal Reserve Bank's Apr. factory activity index for the mid-Atlantic region is expected to have moved up a little. The headline index slipped in March, but the new orders and shipments indexes improved. The unfilled orders index ease to 5.7, from 10.2 in February. Changes in the employment related indexes also slipped.



The outlook for the next six months showed signs of flagging. The overall business activity index stood at 14.6, from 31.1 in February, and a long-term average of 35.5. Expectations regarding new orders, shipments, and unfilled orders were more tempered in March as well. All the future expectations indexes were running below their long-term averages in March with the exception of planned capital expenditures.



Friday, Apr. 21





MEETING OF NOTE





Central bank chiefs and finance ministers meet at a Group-of-Seven meeting in Washington, D.C.



Earnings Calendar



Date



Companies



Monday, Apr. 17



Eaton, Genuine Parts, Marshall & Ilsley, SunTrust, W.W. Grainger, Wachovia



Tuesday, Apr. 18



Allstate, Amgen, Boston Scientific, D.R. Horton, Dow Jones & Company, Gilead Sciences, Johnson & Johnson, Mattel, Mellon Financial, Merrill Lynch, Motorola, National City, Pepsi Bottling Group, State Street, Texas Instruments, U.S. Bancorp, Unisys, UnitedHealth Group, Washington Mutual, Wells Fargo & Company , Yahoo, and more.



Wednesday, Apr. 19



Abbott Laboratories, Ambac Financial Group, American Standard, Apple Computer, CIT Group, Coca-Cola, Comerica, CSX, E*TRADE Financial, eBay, General Dynamics, Genzyme, Honeywell, Huntington Bancshares, IMS Health, Intel, J.P. Morgan Chase & Co, Johnson Controls, Novellus Systems, QUALCOMM, St. Jude Medical, United Technologies



Thursday, Apr. 20



Altria Group, Bank of America, Bank of New York, Baxter International, BB&T, BellSouth, Broadcom, Capital One Financial, Cooper Industries, Danaher, Eli Lilly, EMC, Equifax, First Data, General Motors, Golden West Financial, Google, Hershey Company, Illinois Tool Works, International Game Technology, Leggett & Platt, Marriott International, MeadWestvaco, MedImmune, Merck & Co, Molex, Noble, Nucor, PMC-Sierra, PNC Financial Services Group, Quest Diagnostics, Robert Half International, Schering-Plough, SLM, Southwest Airlines, Stryker Textron, Union Pacific, United Parcel Service, VeriSign



Friday, Apr. 21



3M Company, Ford Motor, Halliburton, Ingersoll-Rand, RadioShack, Schlumberger, Wyeth









[Footnote for tables: * Median forecast from Action Economics]