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Little Inflation Allows Fed to Focus on Growth: Economy

By Shobhana Chandra
February 20, 2014 4:11 PM EST 19 Comments
Shoppers enter an H&M store in New York on Jan. 6, 2014.
Photographer: Jin Lee/Bloomberg
Shoppers enter an H&M store in New York on Jan. 6, 2014.

The cost of living in the U.S. rose at a slower pace in January, giving the Federal Reserve scope to maintain stimulus to allow the world’s largest economy to strengthen further.

The consumer-price index increased 0.1 percent after a 0.2 percent gain in December, according to Labor Department data today in Washington. Other reports showed claims for jobless benefits fell last week, bad weather played havoc with manufacturing figures this month and consumers were feeling less pessimistic about the economic outlook.

Clothing stores and auto dealers were among retailers cutting prices last month in a bid to lure shoppers grappling with the snowstorms that blanketed much of the U.S. The lack of price pressure supports the arguments of Fed officials who say the central bank needs to focus as much on too-low inflation as it does on bringing down the jobless rate.

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“There is very little pricing power for businesses,” said Julia Coronado, chief economist for North America at BNP Paribas in New York, the top ranked CPI forecaster over the past two years, according to data compiled by Bloomberg. “There doesn’t seem to be any need to tighten policy any time soon.”

Stocks rose, erasing most of yesterday’s drop, after the reports. The Standard & Poor’s 500 Index climbed 0.6 percent to 1,839.78 at the close in New York.

Manufacturing Indexes

Measures tracking U.S. manufacturing were mixed as poor weather conditions continued into this month, other figures showed today. The Markit Economics preliminary factory index increased to 56.7 in February from a final reading of 53.7 last month as production and new orders expanded at faster rates than in January, the London-based group said.

A report from the Federal Reserve Bank of Philadelphia showed manufacturing in the area covering eastern Pennsylvania, southern New Jersey and Delaware unexpectedly contracted at the fastest pace in a year.

Factories also struggled overseas. In China, manufacturing contracted in February by the most in seven months, according to figures from HSBC Holdings Plc and Markit. Markit’s factory gauge for the euro region also decreased, while its services measure rose less than projected.

Another report from the Labor Department today showed fewer Americans filed applications for unemployment benefits last week, a sign employers are holding the line on firings even as cold weather slowed industries from manufacturing to housing.

Fewer Claims

Jobless claims declined by 3,000 to 336,000 in the week ended Feb. 15, according to Labor Department data. The median forecast of economists surveyed by Bloomberg called for a decrease to 335,000.

A slowdown in dismissals could lay the groundwork for a pickup in hiring, and more jobs could translate to a boost in consumer spending. An improving job market would support a turnaround in an economy held back by harsh winter weather that has slowed retail sales, employment and factory production.

“I think the fundamentals for stronger job growth are in place,” said Ryan Sweet, senior economist at Moody’s Analytics Inc. in West Chester, Pennsylvania, and the best forecaster of jobless claims the past two years, according to data compiled by Bloomberg. “We’re going to get some of the jobs that weren’t added in December and January because of weather,” though it may not be until March, he said.

Consumer prices in the U.S. rose 1.6 percent over the past 12 months, the biggest year-to-year increase since July, today’s report from the Labor Department showed.

Energy, Food

Energy costs increased 0.6 percent in January from a month earlier as jumps in the cost of electricity and natural gas, probably associated with the need to heat homes during last month’s winter chill, outpaced a decline in gasoline prices.

Food costs rose 0.1 percent and were up 1.1 percent over the past 12 months. That matched December as the smallest year-to-year increase since August 2010.

Whole Foods Market Inc., the largest U.S. natural-goods grocer, trimmed its full-year forecast amid increased competition. The Austin, Texas-based based company, which sells items such as flour, coffee, milk and frozen pizza under its less expensive 365 Everyday Value brand, said it lowered the average selling price per item in the first quarter as it expanded steps to attract shoppers.

“These efforts include improving our relative price positioning, expanding our value offerings across the store, and increasing our promotional activity,” Co-Chief Executive Officer Walter Robb said on a conference call on Feb. 12.

Luxury Discounts

Other retailers have little leeway to raise prices as they continue to compete for customers following a holiday season in which discounts were as steep as 75 percent at luxury department-store chain Neiman Marcus Group LLC.

Fast-food chains introducing new foods and discount fare include Burger King Worldwide Inc., which was advertising a two-sandwiches-for-$5 deal this month.

Excluding volatile food and fuel, the so-called core measure of consumer prices also advanced 0.1 percent in January from the prior month, today’s report showed. It rose 1.6 percent from January 2013, the smallest 12-month gain since June.

Gains in the cost of hotel rooms, medical care and rents were mostly offset by declining costs for new and used cars, clothing and airline fares.

Those lower prices may be helping households feel better about the future. The share of consumers expecting the economy to worsen fell in February to an almost two-year low as Americans looked beyond harsh winter weather, data from the Bloomberg Consumer Comfort Index showed today.

Consumer Outlooks

Thirty percent, the fewest since May 2012, said the economy was headed in the wrong direction. The gap between positive and negative expectations was minus 3, an eight-month high. The weekly confidence measure was little changed at minus 30.6 for the period ended Feb. 16 from minus 30.7.

Another gauge also signaled the economy will bounce back after winter storms damped economic growth at the beginning of 2014. The Conference Board’s index of leading indicators climbed 0.3 percent in January after no change the prior month, the New York-based group said today. The gauge is a measure of the outlook for the next three to six months.

The minutes of the Fed’s January meeting released yesterday showed some officials remained concerned inflation was too low. Some participants wanted an “explicit indication” in their annual statement on policy goals that prices persistently above or below their 2 percent inflation target would be “equally undesirable” to a pickup in prices.

The personal consumption expenditures price index, the central bank’s preferred price gauge, rose 1.1 percent last year, the latest data show, about half of the Fed’s goal.

Central bank officials also plan to soon change their guidance for the path of interest rates as unemployment declines toward a threshold for considering an increase in borrowing costs, the minutes showed.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

To contact the editor responsible for this story: Carlos Torres at ctorres2@bloomberg.net

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