|Stimulus Occurring All Over the World
Everywhere we look, governments and central banks are pulling out the fiscal and monetary stops. Japan is implementing further QE close on the heels of QE from the US and Europe. Yesterday China implemented a small QE leading to a rally in the Chinese stock market, more is expected. India and Brazil are lowering interest rates, in spite of inflation risks. Brazil is lowering taxes on electricity, and several other countries are talking about lowering tax rates to stimulate economic growth. Singapore’s finance minister has announced that the country stands ready to take action if the economy weakens — and in our opinion, its central bank will soon lower rates. Protectionist taxes in Brazil, Russia, India, and China are under attack. India is undertaking a major program to stimulate growth. Foreign direct investment in the retail sector is being encouraged. In exchange for market access, foreign retailers agree to spend half of their investment on infrastructure, cold storage, warehouses, and roads. A global flood of QE and fiscal stimulus is underway.
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Households Feel the Squeeze of Rising Inflation and Falling Wages
Over the last five decades, the analytical methodology used to calculate the CPI has shifted several times, and the weight and numbers of items included in the index have changed frequently. We along with others have no doubt that these changes have been instituted to improve public sentiment about the inflationary environment. This benefits a wide spectrum of institutional actors, both public and private. If data were selected and analyzed today with the methodology used in past decades, official CPI figures would show a far higher rate of inflation. As we discussed in the last GBNI™ commentary, wages rising in nominal terms have fallen far short of the rise in cost of basic needs for food, clothing, energy, and shelter. This trend is continuing, and is visible even in the official Census Bureau figures — but the contrast between actual costs of basic needs and income is more stark when income is compared to the GBNI™.
Guild Basic Needs Index (August 2012)
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The Producer Price Index (PPI), another official inflation measure, tracks the average prices received by domestic producers for their products. As with the “core CPI,” “core PPI” excludes food and energy prices. The PPI showed a disquieting 0.6 percent increase for the month of August 2012 alone.
The Federal Reserve has a dual mandate: first, to maximize employment, and second, to keep prices stable. According to recent Fed announcements, Fed policy is now favoring its mandate to maximize employment over its mandate to moderate inflation. To summarize, with inflationary policies being deployed in the U.S. and worldwide to combat the threat of deflation and contraction, inflationary effects are already being seen in various economies, and we believe they will be seen in Japan, Europe, and the U.S. in the not-too-distant future. The August PPI data mentioned above may be an example.
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