Tag Archives: Inflation

Fed’s Powell keeps to script on jobs recovery, feels heat on inflation front

By Howard Schneider

WASHINGTON (Reuters) – Federal Reserve Chair Jerome Powell on Wednesday pledged “powerful support” to complete the U.S. economic recovery from the coronavirus pandemic, but faced sharp questions from Republican lawmakers concerned about recent spikes in inflation.

In testimony to the U.S. House of Representatives Financial Services Committee, Powell said he is confident recent price hikes are associated with the country’s post-pandemic reopening and will fade, and that the Fed should stay focused on getting as many people back to work as possible.

Any move to reduce support for the economy, by first slowing the U.S. central bank’s $120 billion in monthly bond purchases, is “still a ways off,” Powell said, with millions of people who were working before the crisis still to be pulled back into the labor force.

“The high inflation readings are for a small group of goods and services directly tied to the reopening,” Powell testified, language that indicated he saw no need to rush the shift towards post-pandemic policy.

Representative Ann Wagner, a Republican from Missouri, challenged that conclusion, relaying what’s likely to be a refrain from lawmakers as long as inflation continues to rise: their constituents are getting worried.

At a prior hearing in February “you reiterated that price spikes were temporary. I can tell you that the families and businesses I represent are not feeling that these price spikes are temporary,” Wagner said.

“The incoming data have been higher than expected and hoped for but are still consistent” with a temporary bout of higher prices, Powell responded.

“It is housing, appliances, food prices, gas,” Wagner retorted, a sign of what could become growing political pressure on the Fed to get tougher on inflation if the spikes in prices continue.

Representative Anthony Gonzalez, a Republican from Ohio, took aim at a new Fed framework that aims to encourage higher employment by letting inflation run “moderately” above the central bank’s 2% target “for some time”

“How long is ‘some time’?” Gonzalez asked, arguing that the Fed’s current policies may be doing little to encourage employment at a time when employers are already posting record numbers of jobs.

“It depends,” Powell said, demonstrating the dilemma he faces if prices continue rising. “Right now inflation is well above 2%. … The question for the (Federal Open Market) Committee will be where does this leave us in six months.”

U.S. Treasury yields fell after the release of Powell’s prepared testimony earlier on Wednesday and remained lower even though prices of factory inputs rose at a higher-than-expected pace in June, an indication markets construed his comments as a sign the monetary taps will stay open.

Powell’s remarks were notable as well for excluding any mention of risks to the recovery from the coronavirus Delta variant, with the Fed chief saying the central bank expects strong upcoming job gains “as public health conditions continue to improve.”

The Fed’s June meeting saw officials begin a move towards post-pandemic policy, with some of them poised to tighten financial conditions sooner to ensure inflation remains contained. Renewed coronavirus-related risks, if they materialize, could push the Fed in the other direction of keeping support for the recovery in place longer in case household and business spending wane amid a rise in new infections.

Falling Treasury bond yields have indicated concern among investors about slowing U.S. economic growth, even as new data on prices this week showed consumers paying appreciably more for an array of goods and services, including appliances, fabric, beef and rent.

In a report to Congress last week, the Fed said that as the “extraordinary circumstances” of the reopening subside, “supply and demand should become better aligned, and inflation is widely expected to move down.”

RISING DELTA

While each month of high inflation makes it harder to stick to that conviction, Powell for now is keeping to the Fed’s core narrative of a job market that still needs massive help from the central bank to restore it to its pre-pandemic health and minimize the long-term damage from a historic, virus-driven calamity.

The Fed has said it will not reduce its bond-buying program absent “substantial further progress” in regaining the roughly 7.5 million jobs still missing since the onset of the pandemic in March 2020, a threshold policymakers feel will likely be met later this year.

That hinges, however, on continued reopening of the economy, recovery in the travel, leisure and other “social” industries devastated by the health crisis, and the willingness of currently unemployed or homebound individuals to fill the record number of jobs on offer.

When Powell last spoke about the economy at a news briefing after the end of the June 15-16 policy meeting, new daily coronavirus infections were falling toward recent lows, and the Fed dropped language from its policy statement that the pandemic “continues to weigh on the economy.”

Since then the Delta variant has pushed the seven-day moving average of cases from 11,000 to above 21,000, and health officials are concerned about the spread of the variant in parts of the country where vaccination rates are low. The numbers are more ominous globally.

Powell is scheduled to appear before the U.S. Senate Banking Committee at 9:30 a.m. (1330 GMT) on Thursday.

(Reporting by Howard Schneider; Editing by Dan Burns, Andrea Ricci and Paul Simao)

Fed says shortages of materials, hiring problems holding back recovery

WASHINGTON (Reuters) -Shortages of materials and “difficulties in hiring” are holding back the U.S. economic recovery from the coronavirus pandemic and have driven a “transitory” bout of inflation, the Federal Reserve said on Friday.

“Progress on vaccinations has led to a reopening of the economy and strong economic growth,” the U.S. central bank said in its semiannual report to Congress on the state of the economy. However, “shortages of material inputs and difficulties in hiring have held down activity in a number of industries.”

The report will be the subject of hearings in Congress next week, including testimony from Fed Chair Jerome Powell about the outlook for the economy, inflation, and the transition of monetary policy as the impact of the pandemic recedes.

The report released by the Fed on Friday is largely backward-looking, but it documents the central bank’s view that the recovery remains on track as firms and families navigate a complicated economic reopening.

Prices have risen faster than expected, for example, and while the supply bottlenecks and other factors driving the price hikes are expected to ease over time, “upside risks to the inflation outlook in the near term have increased,” the Fed said.

Hiring has also slowed for an unexpected reason: Companies want to bring on more employees, but not enough workers are ready to take those jobs as they cope with ongoing health and family concerns and can rely on continued federal unemployment benefits to help pay the bills.

“Many of these factors should have a diminishing effect on participation in the coming months,” the Fed said, though the speed and strength of that labor market recovery also remains uncertain.

The central bank, however, said available data suggest “a further robust increase in demand” occurred from April through June.

“Against a backdrop of elevated household savings, accommodative financial conditions, ongoing fiscal support, and the reopening of the economy, the strength in household spending has persisted,” while the financial system remains “resilient,” the Fed said.

(Reporting by Howard SchneiderEditing by Paul Simao)

Fed officials say important they be ‘well positioned’ to act, minutes show

By Howard Schneider, Jonnelle Marte and Lindsay Dunsmuir

WASHINGTON (Reuters) – Federal Reserve officials last month felt that substantial further progress on the economic recovery “was generally seen as not having yet been met,” but agreed they needed to be poised to act if inflation or other risks materialized, according to the minutes of the U.S. central bank’s June policy meeting.

In minutes that reflected a divided Fed wrestling with the onset of inflation and financial stability concerns, “various participants” at the June 15-16 meeting felt conditions for reducing the central bank’s asset purchases would be “met somewhat earlier than they had anticipated.”

Others saw a less clear signal from incoming data and cautioned that reopening the economy after a pandemic left an unusual level of uncertainty and required a “patient” approach to any policy change, stated the minutes, which were released on Wednesday.

Still “a substantial majority” of officials saw inflation risks “tilted to the upside,” and the Fed as a whole felt it needed to be prepared to act if those risks materialize.

“Participants generally judged that, as a matter of prudent planning, it was important to be well positioned to reduce the pace of asset purchases, if appropriate, in response to unexpected economic developments, including faster-than anticipated progress toward the Committee’s goals or the emergence of risks that could impede the attainment of the Committee’s goals,” the minutes stated.

The Federal Open Market Committee at its meeting last month shifted towards a post-pandemic view of the world, dropping a longstanding reference to the coronavirus as a constraint on the economy and, in the words of Fed Chair Jerome Powell, “talking about talking about” when to shift monetary policy as well.

The start of that discussion, along with interest-rate projections showing higher borrowing costs as soon as 2023, caused investors to anticipate the Fed will move faster than expected to end its support for an economy still afflicted by high levels of unemployment and, now, rising inflation.

Long-term Treasury yields are near five-month lows, and the gap between those and shorter-term yields has been narrowing, a development often associated with skepticism about the outlook for longer-term economic growth.

In this case, Cornerstone Macro analyst Roberto Perli wrote recently, “the market views the perceived Fed shift as harmful to the long-term prospects for the U.S. economy,” with the Fed’s stated commitment to getting back to full employment seen as weakening in the face of higher-than-anticipated inflation.

Powell, speaking to reporters after the end of last month’s policy meeting, said any increase in the Fed’s benchmark overnight interest rate from the current near-zero level remained far off. He said, however, that the Fed would begin a “meeting-by-meeting” assessment of when to start reducing its $120 billion in monthly purchases of Treasury bonds and mortgage-backed securities, and of how to announce its plans for doing so.

The U.S. economy, he said at that point, was still “a ways away” from the progress on job creation the Fed wants to see before reducing its asset-purchase program, which supports the recovery by making the purchase of homes, cars and similar items more affordable by holding down borrowing costs for households and companies.

But “we’re making progress,” Powell said in the briefing, and to such an extent that he and his colleagues now needed to “clarify … thinking around the process of deciding whether and how to adjust the pace and composition of asset purchases.”

TAPERING TIMELINE

What investors are wondering is how fast the discussion will spool out and when the actual “taper” may begin.

Several regional Fed policymakers have since said they felt the economy was near the point where the central bank should pull back. However, even some of them have indicated it will take several meetings to develop and announce a plan for reducing the bond purchases.

The Fed’s policy-setting committee meets eight times a year, with the next two meetings scheduled for July 27-28 and Sept. 21-22. In the interim, the central bank will hold its annual research conference in Jackson Hole, Wyoming, a setting that Fed chiefs have often used to signal policy changes.

The U.S. economy added 850,000 jobs in June. If that pace of hiring continues over the summer, it “could prompt the Committee to accelerate the tapering timeline” from an expected start in January to as soon as October, analysts from Nomura wrote last week.

Economists polled by Reuters expect the Fed to announce a strategy for tapering its asset purchases in August or September, with the first cut to its bond-buying program beginning early next year.

(Reporting by Howard Schneider; Editing by Dan Burns and Paul Simao)

Russia reports record 737 COVID-19 deaths, changes entry rules

MOSCOW (Reuters) – Russia on Tuesday reported a record 737 deaths from coronavirus-linked causes in the past 24 hours as the country stepped up efforts to vaccinate its population of more than 144 million people.

A new surge in COVID-19 cases in June was blamed on the new, highly infectious, Delta variant. Moscow responded with mandatory vaccination for a wide group of citizens, a model adopted by other regions, sparking wide public discontent ahead of September parliamentary elections.

Health minister Mikhail Murashko said up to 850,000 people were being vaccinated against COVID-19 in Russia every day, and that building immunity across the population was key, the TASS new agency reported.

Murashko said foreign producers of COVID-19 vaccines had applied to register in Russia, without disclosing their names.

Russia has so far offered its own vaccines against the novel coronavirus, launching a mass vaccination campaign in late 2020.

From Wednesday, Russia will change the rules for citizens returning from abroad, scrapping the obligation to undergo two PCR tests upon arrival, a decree published on Tuesday and signed by Anna Popova, head of the consumer health watchdog, showed.

From July 7, all those vaccinated or officially recovered from COVID-19 do not need to take a PCR test. Those who do not fall into these two categories when they enter Russia, will need to self-isolate before receiving results of one PCR test.

In the past day, Russia has confirmed 23,378 new COVID-19 cases, including 5,498 in Moscow, taking the official national tally since the pandemic began to 5,658,672.

The Kremlin said it would not support the idea of closing borders between Russia’s regions to stop the virus from spreading, although some regions may take swift and harsh measures to withstand the pandemic.

The recent surge in COVID-19 cases, along with the need to raise interest rates to combat inflation, are seen challenging economic growth in Russia this year.

(Reporting by Andrey Ostroukh and Gleb Stolyarov; additional reporting by Olzhas Auyezov; Editing by Catherine Evans, William Maclean)

Transitory or here-to-stay? Investors try to read the inflation clues

By David Randall

NEW YORK (Reuters) – From lumber prices to wages and inventories: Reading the clues around inflation has turned into an investor obsession.

The combination of supply bottlenecks from the reopening of the global economy and the resumption of economic growth sent consumer prices in May up by the largest annual jump in nearly 13 years. Employers are raising wages as they compete for scarce workers while retailers have limited inventories because of shipping and production delays.

As investors assess the risks of rising prices to financial markets, however, some think the biggest gains in inflation are already in the rear-view mirror. That is in line with the Federal Reserve’s notion that inflation will be “transitory.”

The Fed meets on Tuesday and Wednesday, and investors will parse every word of its post-meeting statement.

The Fed has been buying $80 billion in Treasuries and $40 billion in mortgage-backed securities monthly, putting downward pressure on longer-term borrowing costs to encourage investment and hiring. Discussions about tapering those purchases are likely at this week’s policy meeting.

“As long as the increase in inflation is modest, stocks could continue to move higher,” said Russ Koesterich, portfolio manager of the $27.6 billion BlackRock Global Allocation Fund.

Koesterich thinks inflation will likely run above trend lines well into 2022 given the bottlenecks in global supply chains. Yet disinflationary forces such as an aging global population and gains in efficiency due to technology will keep a lid on “any 1970’s-style inflation scare,” he said.

Investors who bet on inflation typically move into groups better-positioned to weather price rises, like materials and energy and companies with pricing power. Value stocks, in contrast, benefit from a broad economic recovery that does not become weighed down by steeply rising prices.

Koesterich said his fund has been decreasing its positions in growth stocks like technology and adding to industrials and European banks.

Jeff Mayberry, portfolio manager of the DoubleLine Strategic Commodity fund, thinks May’s inflation numbers will be the highest for the remainder of the year and remains bullish on oil, which hit a multi-year high on Friday. He sees the commodity benefiting from economic growth.

“The market was looking for a reason for inflation to be transitory and they got it,” Mayberry said of May’s inflation number, noting that some of the larger contributors came from short-term factors such as a spike in the price of rental cars.

Ernesto Ramos, chief investment officer at BMO Global Asset Management, also sees price rises as transitory. He cites a drop in lumber prices from May’s high that suggests supply chain bottlenecks will subside and “give us another reason to believe that inflation will remain under control.” Lumber prices are down more than 40% from record highs hit in early May.

REASONS TO WORRY

While the majority of investors believe inflation is transitory, according to a Bank of America fund manager survey, worries remain.

“Inflation has been the most discussed topic with clients for weeks, bordering on obsession,” wrote analysts at Morgan Stanley led by Michael Wilson. Those analysts think the rate of change on inflation is peaking.

Greg Wilensky, head of U.S. Fixed Income at Janus Henderson, said he has been buying more Treasury-Inflation Protected Securities as the break-even rate – a measure of expected inflation in the bond market – has retreated to near its February levels.

While he is not “changing my base case” that high inflation will prove to be transitory, “the risks around the base case continue to skew toward the upside on inflation,” given the persistent difficulties companies are having hiring lower-paid workers, Wilensky said.

The Fed’s statement could give important clues.

“I’m going to watch the Fed on Wednesday and if they treat these numbers with nonchalance it is a green light to bet heavily on the inflation trade,” Paul Tudor Jones of Tudor Investment Corp told CNBC on Monday. He said he would be “really concerned arguing that inflation is transitory” with inventories at a “record low” while demand is “screaming.”

Morgan Stanley Chief Executive James Gorman told CNBC on Monday that “my gut tells me that this economy is recovering faster, inflation is moving quicker and inflation may not be as transitory as we all expect.” He cited the global economic recovery and record levels of fiscal and monetary support.

“Even if investors disagree with the Fed’s often-stated mantra that inflation is just transitory, they have learned to respect the massive influence the world’s most powerful central bank has when possessing such conviction that is not even ‘thinking about thinking’ about easing its foot off the stimulus accelerator,” said Mohamed El-Erian, chief economic adviser at Allianz. “The resulting comfort with continued ultra-loose financial conditions is supportive in the short run of elevated stock prices and low yields.”

(Reporting by David Randall; Editing by Megan Davies and Dan Grebler)

‘Worst’ of inflation seen likely this summer, easing in fall: U.S. official

WASHINGTON (Reuters) – U.S. consumer prices are likely to peak this summer and then begin to dissipate in the autumn, an official with the Biden administration said on Thursday, after news that the consumer price index increased again – by 0.6% – last month.

In the 12 months through May, the CPI accelerated 5.0%, hitting its biggest year-on-year increase since August 2008 and following a 4.2% rise in April. But the official, who asked not to be named, said that was largely due to a “base effect” given the low level of prices seen in the early phase of the COVID-19 pandemic.

The Biden administration remained convinced that the current spike in consumer prices would be transitory, and that assessment was shared by professional forecasters, investors, consumers and businesses, said the official.

“It’s most likely that it’s going to peak in the next few months. We’ll probably see the worst of it this summer, and (then) in the fall, things will probably start to get back to normal,” the official said.

Investors also clearly expected low inflation moving forward, given five-year forward positions, the official said.

“From a ‘put your money where your mouth is’ perspective, it’s pretty clear what investors think. And the same is true for surveys of consumers, surveys of business leaders, and professional forecasters. Everyone’s on the same page.”

The official rejected concerns voiced by Republican lawmakers that President Joe Biden’s proposed boost in spending on infrastructure, child care and community college would put further pressure on prices, given that the spending would only kick in around 2023 and then spread out over a decade.

“This is not piling stimulus upon stimulus,” the official said. “This is addressing a long-term problem over a longer duration. This is a decade-long plan to fix 40-year problems.”

(Reporting by Andrea Shalal; Editing by Andrea Ricci)

U.S. job growth improves; desperate employers raise wages to attract workers

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. employers increased hiring in May and raised wages as they competed for workers, with millions of unemployed Americans still at home because of childcare issues, generous unemployment checks and lingering fears over COVID-19.

Though the pickup in job growth shown in the Labor Department’s closely watched employment report on Friday missed economists’ forecasts, it offered some assurance that the recovery from the pandemic recession remained on track.

Growth is being supported by vaccinations against COVID-19, massive fiscal stimulus and the Federal Reserve’s ultra-easy monetary policy stance. April’s nonfarm payrolls count, which delivered about a quarter of the new jobs economists had forecast, caused handwringing among some analysts and investors that growth was stagnating at a time when inflation was rising.

“There are still a lot of people unemployed, but there does not seem to be a lot of eagerness to work,” said Chris Low, chief economist at FHN Financial in New York. “There would have been many more hires if employers could find more people.”

Nonfarm payrolls increased by 559,000 jobs last month. Data for April was revised higher to show payrolls rising by 278,000 jobs instead of 266,000 as previously reported.

That left employment about 7.6 million jobs below its peak in February 2020. Economists polled by Reuters had forecast 650,000 jobs created in May. About 9.3 million people were classified as officially unemployed last month. There are a record 8.1 million unfilled jobs.

At least half of the American population has been fully vaccinated against the virus, according to data from the U.S. Centers for Disease Control and Prevention.

That has allowed authorities across the country to lift virus-related restrictions on businesses, which nearly paralyzed the economy early in the pandemic. But the reopening of the economy is straining the supply chain.

Millions of workers, mostly women, remain at home as most school districts have not moved to full-time in-person learning. Despite vaccines being widely accessible, some segments of the population are reluctant to get inoculated, which labor market experts say is discouraging some people from returning to work.

Government-funded benefits, including a $300 weekly unemployment subsidy, are also constraining hiring. Republican governors in 25 states are terminating this benefit and other unemployment programs funded by the federal government starting next Saturday.

These states account for more than 40% of the workforce. The expanded benefits end in early September across the country. That, together with more people vaccinated and schools fully reopening in the fall, is expected to ease the worker crunch.

Labor Secretary Marty Walsh said the argument that enhanced benefits were discouraging job seeking was not supported by what workers were telling him.

“Working people across America are eager to work,” said Walsh in a statement. “But workers also told me about the challenges they and their families face, finding affordable childcare, caring for elderly parents and grandparents”

Stocks on Wall Street were trading higher. The dollar fell against a basket of currencies. U.S. Treasury prices rose.

WILLING WORKERS IN SHORT SUPPLY

Average hourly earnings rose a solid 0.5% after shooting up 0.7% in April. That raised the year-on-year increase in wages to 2.0% from 0.4% in April. Wages in the leisure and hospitality sector jumped 1.3%, the third straight month of gains above 1%.

Postings on Poachedjobs.com, a national job board for the restaurant/hospitality industry, are showing restaurants offering as much as $30-$35 per hour for lead line cooks.

Sustained wage growth could strengthen the argument among some economists that higher inflation could last longer rather than being transitory as currently envisioned by Fed Chair Jerome Powell. A measure of underlying inflation tracked by the Fed for its 2% target accelerated 3.1% on a year-on-year basis in April, the largest increase since July 1992.

Still, most economists do not expect the U.S. central bank to start withdrawing its massive economic support anytime soon.

“The data will likely reinforce the view of most Fed officials that progress has not been ‘substantial’ enough for them to start signaling tapering,” said Jim O’Sullivan, chief U.S. macro strategist at TD Securities in New York.

The average workweek held steady at 34.9 hours. That together with strong wage gains lifted an income proxy 0.9%, matching April’s gain. This bodes well for consumer spending, which could also get a powerful tailwind from the more than $2.3 trillion in excess savings amassed during the pandemic.

Economists are sticking to their forecasts for double-digit growth this quarter.

Last month’s increase in hiring was led by the leisure and hospitality industry, which added 292,000 jobs, with restaurants and bars accounting for 186,000 of those positions. Local government education employment rose by 53,000 jobs as the resumption of in-person learning and other school-related activities in some parts of the country continued.

Manufacturing payrolls increased by 23,000 jobs. But construction employment decreased by 20,000 jobs.

The unemployment rate fell to 5.8% from 6.1% in April. The drop was in part due to more jobs created and 53,000 people dropping out of the labor force. The jobless rate has been understated by people misclassifying themselves as being “employed but absent from work.” Without this problem, the unemployment rate would have been 6.1%.

The labor force participation rate, or the proportion of working-age Americans who have a job or are looking for one, fell to 61.6% from 61.7% in April.

“It appears like employers may need to offer up more incentives to entice workers to fill the record number of job openings that are out there,” said Charlie Ripley, senior investment strategist at Allianz Investment Management.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)

U.S. labor market worse than it appears, Fed paper suggests

SAN FRANCISCO (Reuters) – U.S. labor market signals are conflicting to an “unprecedented” degree, but those suggesting labor market slack should be given more weight than those pointing to tightness, according a paper published Monday by the San Francisco Federal Reserve Bank.

The paper looked at 26 labor market measures that typically move in tandem and found that during the current recovery they are giving wildly divergent signals about the health of the job market.

The job openings rate, for instance, suggests the job market is much tighter than the unemployment rate; the labor force participation rate points to much more slack than detected in the unemployment rate.

Because the pandemic has forced so many people out of the workforce, “negative signals such as the low labor force participation rate provide a better read than do the positive signals,” the researchers argued. “Overall, our findings reveal that the labor market situation is worse than some headline numbers suggest.”

U.S. central bankers are debating how tight the U.S. labor market has become amid widespread reports from employers about hiring difficulties even as the economy still has 8 million fewer people working than before the pandemic.

The question matters because the Fed says it could start reducing its support for the economy once inflation and the labor market have made “substantial further progress” toward the Fed’s goals of 2% inflation and maximum employment. It hasn’t, however, laid out exactly how it will measure that progress.

The U.S. unemployment rate was 6.1% in April and a reading for May is due out on Friday.

(Reporting by Ann Saphir; Editing by Steve Orlofsky)

Pent-up demand, shortages fuel U.S. inflation

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. consumer prices surged in April, with a measure of underlying inflation blowing past the Federal Reserve’s 2% target and posting its largest annual gain since 1992, because of pent-up demand and supply constraints as the economy reopens.

The strong inflation readings reported by the Commerce Department on Friday had been widely anticipated as the pandemic’s grip eases, thanks to vaccinations, and will have no impact on monetary policy. Fed Chair Jerome Powell has repeatedly stated that higher inflation will be transitory.

The U.S. central bank slashed its benchmark overnight interest rate to near zero last year and is pumping money into the economy through monthly bond purchases. It has signaled it could tolerate higher inflation for some time to offset years in which inflation was lodged below its target, a flexible average.

The supply constraints largely reflect a shift in demand towards goods and away from services during the pandemic. A reversal is underway, with Americans flying to vacation destinations and staying at hotels among other activities. Year-on-year inflation is also accelerating as last spring’s weak readings drop from the calculation.

“Many goods are in short supply amid very strong demand and supply chain disruptions, and some services prices are up sharply as consumers start to go out again,” said Gus Faucher, chief economist at PNC Financial in Pittsburgh, Pennsylvania. “Shortages of labor in some industries are also contributing to higher prices. But many of these factors will prove transitory, and inflation will slow in the second half of 2021.”

Consumer prices as measured by the personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, increased 0.7% last month amid strong gains in both goods and services. That was the biggest rise in the so-called core PCE price index since October 2001 and followed a 0.4% gain in March.

In the 12 months through April, the core PCE price index vaulted 3.1%, the most since July 1992, after rising 1.9% in March. Economists polled by Reuters had forecast the core PCE price index rising 0.6% in April and surging 2.9% year-on-year.

The core PCE price index is the Fed’s preferred inflation gauge.

Stocks on Wall Street were trading higher, though gains were capped by the rising price pressures. The dollar rose against a basket of currencies. U.S. Treasury prices were higher.

“Inflation is up, but real yields are still low,” said Jamie Cox, managing partner at Harris Financial Group in Richmond, Virginia. “This is basically the transitory sweet spot.”

INCOME PLUNGES

Some economists are not convinced that higher inflation will be temporary.

A survey from the University of Michigan on Friday showed consumers’ one-year inflation expectations shot up to 4.6% in May from 3.4% in April, hurting household sentiment. Their five-year inflation expectations rose to 3.0% from 2.7% last month.

“Concerns about the future can cause households to become more conservative in their spending,” said Joel Naroff, chief economist at Naroff Economics in Holland, Pennsylvania. “The Fed is guessing that the rise in inflation will be temporary, and it better be correct.”

Though consumer spending moderated last month as the boost to incomes from stimulus checks faded, households have accumulated at least $2.3 trillion in excess savings during the pandemic, which should underpin demand. Wages are also rising as companies seek to attract labor to increase production.

Generous unemployment benefits funded by the government, problems with child care and fears of contracting the virus, even with vaccines widely accessible, as well as pandemic-related retirements have left companies scrambling for labor.

That is despite nearly 10 million Americans being officially unemployed. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.5% last month. Data for March was revised higher to show spending surging 4.7% instead of 4.2% as previously reported.

The rise in spending was in line with expectations. Spending was held back by a 0.6% drop in outlays on goods. Though purchases of long-lasting goods such as motor vehicles rose 0.5%, spending on nondurable goods tumbled 1.3%. Outlays on services increased 1.1%, led by spending on recreation, hotel accommodation and at restaurants.

When adjusted for inflation, consumer spending slipped 0.1% after jumping 4.1% in March. Despite last month’s dip in the so-called real consumer spending, March’s solid increase put consumption on a higher growth trajectory in the second quarter.

Personal income plunged 13.1% after surging 20.9% in March. With spending exceeding income, the saving rate dropped to a still-high 14.9% from 27.7% in March. Wages increased 1.0% for a second straight month.

Consumer spending powered ahead at a 11.3% annualized rate in the first quarter, contributing to the economy’s 6.4% growth pace. Most economists expect double-digit growth this quarter, which would position the economy to achieve growth of at least 7% this year, which would be the fastest since 1984. The economy contracted 3.5% in 2020, its worst performance in 74 years.

Growth prospects for the second quarter were bolstered by another report from the Commerce Department showing the goods trade deficit narrowed 7.3% to $85.2 billion in April, with exports rising and imports declining.

But inventory at retailers fell 1.6%, pulled down by a 7.0% plunge in automobile stocks as the sector struggles with a global semiconductor shortage.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci and Chizu Nomiyama)

U.S. weekly jobless claims at 14-month low; inflation heating up

By Lucia Mutikani

WASHINGTON (Reuters) – The number of Americans filing new claims for unemployment benefits dropped to a 14-month low last week as companies held onto their workers amid a growing labor shortage that helped to curb employment growth in April.

The scramble for workers comes as the reopening economy is experiencing a boom in demand, resulting in widespread shortages of inputs at factories and fanning inflation. Producer prices increased more than expected in April, leading to the biggest annual gain since 2010, other data showed on Thursday.

The worker shortage is despite nearly 10 million Americans being officially unemployed, a disconnect that economists expect will resolve in the coming months as increased vaccinations ease COVID-19 stress and enhanced unemployment benefits expire, allowing some workers to return to the labor market.

“With demand for workers high and layoffs relatively low, we should see strong hiring in the months to come, as barriers to employment, such as lack of childcare, lessen,” said Robert Frick, corporate economist at Navy Federal Credit Union in Vienna, Virginia. “For many, especially low-wage workers, returning to a job is a puzzle in which several pieces, such as transportation, wage levels and benefits must fall into place.”

Initial claims for state unemployment benefits dropped 34,000 to a seasonally adjusted 473,000 for the week ended May 8, the Labor Department said. That was the lowest since mid-March 2020, when mandatory closures of nonessential businesses were enforced to slow the first wave of COVID-19 infections.

Economists polled by Reuters had forecast 490,000 applications for the latest week. The decrease in claims was led by Michigan, New York and Florida.

Claims have dropped from a record 6.149 million in early April 2020, but remain well above the 200,000 to 250,000 range that is viewed as consistent with a healthy labor market.

Some economists believe the enhanced unemployment benefits programs, including a weekly $300 government subsidy, could be encouraging some people to attempt to file a claim for assistance, though not every application is approved.

The economy created 266,000 jobs in April after adding 770,000 in March, which was partly blamed on the generous unemployment benefits. There are a record 8.1 million open jobs.

Several states in the South and Midwest, such as Tennessee and Missouri, that have unemployment rates below the national average of 6.1% have recently announced they will end federally funded pandemic unemployment benefits next month.

Economists cite the still-bloated jobless rolls as supporting the thesis that unemployment checks were keeping some workers home. There were 3.655 million people receiving benefits after an initial week in the week ended May 1, down 45,000 from the prior week. A total 16.9 million people were collecting unemployment checks under all programs at the end of April.

The government-funded benefits end in early September.

Richmond Federal Reserve president Thomas Barkin said on Thursday, “the question of how to unclog the labor market is going to be a critical one,” in keeping the recovery on track.

Stocks on Wall Street rebounded on the claims data after declining for three straight sessions. The dollar was steady against a basket of currencies. U.S. Treasury prices rose.

DEMAND BOOM

The government has provided nearly $6 trillion in pandemic relief over the past year. More than a third of the population has been fully vaccinated, leading many states to lift most capacity restrictions on businesses.

The resulting pent-up demand is pushing against supply constraints. In another report on Thursday, the Labor Department said its producer price index for final demand rose 0.6% in April after surging 1.0% in March.

A 0.6% increase in the cost of services accounted for about two-thirds of the rise in the PPI. Services, which increased 0.7% in March, were last month driven by higher prices for portfolio management, airline tickets and food retailing as well as physician care.

Goods prices gained 0.6%, lifted by an 18.4% jump in steel mill products. In the 12 months through April, the PPI shot up 6.2%. That was the biggest year-on-year rise since the series was revamped in November 2010 and followed a 4.2% jump in March.

Part of acceleration in the PPI was due to last spring’s weak readings dropping out of the calculation. The report followed on the heels of news on Wednesday that consumer prices increased by the most in nearly 12 years in April.

Though rising prices have spooked investors, the Federal Reserve has signaled it could tolerate higher inflation for some time to offset years in which inflation was lodged below its 2% target, a flexible average.

Fed Vice Chair Richard Clarida said on Wednesday it would be “some time” before the economy is healed enough for the U.S. central bank to consider scaling back its support. The Fed slashed its benchmark overnight interest rate to near zero last year and is pumping money into the economy through monthly bond purchases. Its preferred inflation measure, the core personal consumption expenditures (PCE) price index is at 1.8%.

“Each big inflation report for the next several months will test the Fed’s approach to seeing through these issues it promises to be transitory,” said Will Compernolle, a senior economist at FHN Financial in New York.

Based on the CPI and PPI data, Goldman Sachs is forecasting that core PCE increased 0.49% in April and 3.38% year-on-year.

(Reporting By Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)