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New data show Fed’s inflation debate still unresolved

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October 29, 2021

By Howard Schneider

WASHINGTON (Reuters) – Federal Reserve Chair Jerome Powell, in a high-profile speech in August, outlined the arguments for why the current bout of high U.S. inflation will be “transitory,” and moderate on its own over time.

New data released on Friday show the jury is still out, with the personal consumption expenditures price index rising in September at a 4.4% annual rate versus 4.2% in August, continuing a run of inflation at levels not seen in 30 years.

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Excluding food and energy costs, the index rose at a 3.6% annual rate in September, matching the rise in the prior three months and a sign that price increases continue even when some of the more volatile items are excluded.

Cornerstone Macro economist Nancy Lazar said in a webinar that she still expects Powell to be right. Consumers splurged on goods during the coronavirus pandemic. But demand for things like furniture and computers is now declining, and for many products “we think deflation is the word” for the coming year, with price declines for goods offsetting price increases for services and tempering inflation overall, she said.

Still, employment costs, noted by Powell as something to watch closely, rose in the third quarter at the highest rate since 2001.

“The inflation debate is going to shift to wages very, very quickly,” Lazar said, and whether increases in productivity and an increase in the number of people looking for work help ease rising compensation costs or temper their potential impact on prices.

The U.S. central bank meets next week to update its views about monetary policy, as officials balance their hope to support the economy with low interest rates for as long as possible against concerns inflation may be moving too fast.

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Here’s how the inflation story has evolved:

HIGHER PRICES AHEAD

Fed officials knew early this year that inflation would rise as the global economy rebounded from the pandemic. But where some economists felt record levels of federal spending would produce persistent price increases, most Fed officials expected a fleeting episode driven at first by simple math – the “base effects” of a weak economy returning to normal – along with some inevitable bumps in the reopening.

At their March 16-17 policy meeting, Fed officials marked up their inflation outlook for 2021. Powell, speaking in a news conference after the release of the policy statement and economic projections, said those “relatively modest increases in inflation … will turn out to be a one-time sort of bulge … There was a time when inflation went up, it would stay up. And that time is not now.”

By September, however, inflation was running at twice the Fed’s 2% target, and officials’ projections moved higher.

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(GRAPHIC: The Fed’s inflation outlook – https://graphics.reuters.com/USA-FED/INFLATION/gkvlgxyqnpb/chart.png)

Powell’s own language shifted. “As the reopening continues, bottlenecks, hiring difficulties, and other constraints could again prove to be greater and longer lasting than anticipated, posing upside risks to inflation,” he told reporters after the end of the central bank’s Sept. 21-22 policy meeting.

(GRAPHIC: The COVID inflation surge – https://graphics.reuters.com/USA-FED/INFLATION/akvezawxopr/chart.png)

Some policymakers have pinpointed the end of the year as the moment when inflation needs to ease, or they’ll worry they got it wrong.

Powell and many others still think that will happen, but on a longer timetable than first anticipated, with September data showing little evidence of the expected slowdown.

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BROAD-BASED INCREASES?

“The spike in inflation is so far largely the product of a relatively narrow group of goods and services that have been directly affected by the pandemic and the reopening of the economy,” Powell said in his August remarks.

He cited the fact that alternate inflation measures which toss out the strongest price influences remained moderate. But those measures have moved higher since he spoke, reflecting broader price increases.

(GRAPHIC: Broad based inflation – https://graphics.reuters.com/USA-FED/INFLATION/klpykzrowpg/chart.png)

WANING INFLUENCE OF OUTLIERS

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Policymakers, Powell said, are also “directly monitoring the prices of particular goods and services most affected by the pandemic and the reopening, and are beginning to see a moderation in some cases.”

Powell cited the well-known example of used autos. Used vehicle prices rose at a record pace over the summer, and that has in fact eased. But he also mentioned that price hikes for durable goods in general should moderate, and by some measures that has not yet happened. Inflation for durable goods rose 7.3% in September on an annual basis, versus 7% in August.

(GRAPHIC: Pressure off the top? – https://graphics.reuters.com/USA-FED/INFLATION/klvykzrrwvg/chart.png)

WAGES

“Today we see little evidence of wage increases that might threaten excessive inflation,” Powell said in August. “We will continue to monitor this carefully.”

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The costs of compensation jumped 1.3% for the three months ending in September, the largest increase since 2001, leaving the Fed to assess whether the adjustment of labor supply and demand is near its end, or only beginning. Compensation costs for the hard-hit food and accommodations industry rose more than 7% on an annual basis.

(GRAPHIC: Wage and benefit costs – https://graphics.reuters.com/USA-FED/INFLATION/zdvxorebnpx/chart.png)

EXPECTATIONS

“Longer-term inflation expectations have moved much less than actual inflation or near-term expectations, suggesting that households, businesses, and market participants also believe that current high inflation readings are likely to prove transitory,” Powell said.An argument can be made that the Fed is paying more attention to expectations than inflation itself, though measurement of them is less certain. They have been drifting higher, and if that continues it would be of particular concern.

(GRAPHIC: Inflation expectations ratchet higher – https://graphics.reuters.com/USA-FED/INFLATION/gdvzywakwpw/chart.png)

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‘GLOBAL DISINFLATIONARY FACTORS’

Perhaps the most faith-based aspect of Powell’s August speech was his reference to the global influence of technology, demographics, and smooth world supply chains in anchoring prices.

(GRAPHIC: Global disinflation – https://graphics.reuters.com/USA-FED/INFLATION/xmvjolddxpr/chart.png)

“While the underlying global disinflationary factors are likely to evolve over time, there is little reason to think that they have suddenly reversed or abated,” Powell said. “It seems more likely that they will continue to weigh on inflation as the pandemic passes into history.”The truth of that will depend on developments far outside the Fed’s control, from the global flow of capital to China, for example, as the rule of Chinese leader Xi Jinping evolves, to the impact of climate change mitigation efforts that are still in their infancy.

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

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Yen shines, Aussie sags as Powell turns hawk despite Omicron uncertainty

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December 1, 2021

By Kevin Buckland

(Reuters) – The safe-haven yen held steady on Wednesday, while the risk-sensitive Australian dollar languished near a one-year low after Federal Reserve Chair Jerome Powell signalled a faster taper of stimulus despite the risks around the Omicron COVID-19 variant.

Investors fear that hasty monetary tightening could choke off the nascent economic recovery, with little still known about Omicron’s potential to evade current vaccine protection or how deadly it might be.

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“Investors are staying cautious,” said Shusuke Yamada, chief Japan FX strategist at Bank of America-Merrill Lynch.

“It’s very difficult to make a judgement about the impact of Omicron when we don’t have a lot of information.”

Global markets fell sharply on Tuesday after the head of drugmaker Moderna said existing COVID-19 vaccines would be less effective against the new variant, although BioNTech’s chief executive struck a cautiously positive note, saying the vaccine it makes with Pfizer would likely offer strong protection against severe disease from Omicron.

The Aussie weakened 0.12% to $0.71245 after dipping as low as $0.7063 of Tuesday for the first time since Nov. 3, 2020. The New Zealand dollar was largely flat at $0.68195 after also touching the lowest since early November of last year at $0.6773 in the previous session.

The greenback ticked 0.09% higher to 113.26 yen, but still within sight of an overnight low of 112.535, a level not seen since Oct. 11.

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Powell said in testimony to Congress on Tuesday that Fed officials will discuss at their Dec. 14-15 policy meeting whether to end bond purchases a few months earlier than had been anticipated. The Fed chief finally did an about face on a long-held contention that inflation would be “transitory.”

Powell expressed confidence that the impact from Omicron will be far less than in the spring of 2020, when the pandemic erupted.

In response, traders wound up interest rate hike expectations, with money markets now almost fully priced for tightening at the June meeting.

Powell’s testimony continues later Wednesday.

“Powell’s unexpectedly hawkish tone overnight, essentially asserting that inflation risk has primacy over growth/Omicron risks, should leave the (dollar index) forging ahead,” Westpac strategists wrote in a client note.

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The index, which measures the dollar against six major peers, traded at 95.921 after sliding to 95.544 on Tuesday for the first time since Nov. 18, weighed down largely by an unwinding of bearish bets on the euro, the most heavily weighted component in the basket.

Westpac recommends buying dips in the index down to the mid-95 level.

The single currency slipped 0.04% to $1.1331, down from a two-week high of $1.1387 overnight.

Sterling traded not far from an 11-month low of $1.31945 reached overnight, last changing hands at $1.32955.

(Reporting by Kevin Buckland; Editing by Shri Navaratnam)

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OPEC+ begins two days of talks amid oil rout

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December 1, 2021

LONDON (Reuters) – OPEC and its allies begin two days of meetings on Wednesday to decide whether to release more oil into the market or restrain supply amid an oil price rout and fears the Omicron coronavirus variant could weaken global energy demand.

Oil prices fell to near $70 a barrel on Tuesday from as high as $86 in October, posting their biggest monthly decline since the outset of the pandemic, as the new variant raised fears of a supply glut.

For November, Brent fell by 16.4%, while WTI fell 20.8%, the biggest monthly fall since March 2020.

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“The threat to oil demand is genuine,” said Louise Dickson, senior oil markets analyst at Rystad Energy. “Another wave of lockdowns could result in up to 3 million bpd (barrels per day) of oil demand lost in the first quarter of 2022.”

Also pressuring prices, Federal Reserve Chair Jerome Powell said the U.S. central bank likely will discuss speeding its reduction of bond purchases amid a strong economy and expectations that a surge in inflation will persist.

The Organization of the Petroleum Exporting Countries (OPEC) will meet on Wednesday after 1300 GMT, followed by a meeting on Thursday of OPEC+, which groups OPEC with allies including Russia.

Several OPEC+ ministers, including from Russia and Saudi Arabia, have said there was no need for a knee-jerk reaction from the group.

But some analysts have suggested OPEC+ might put plans to add 400,000 barrels per day (bpd) to supply in January on hold.

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The group was already weighing the effects of last week’s announcement by the United States and other countries to release emergency crude reserves to temper energy prices.

OPEC+ has been gradually winding down record supply cuts of 10 million bpd implemented last year and currently has some 3.8 million bpd of reductions still in place.

The increase in OPEC’s oil output in November has again undershot the rise planned under a deal with allies, a Reuters survey found.

(Reporting by OPEC team, writing by Dmitry Zhdannikov, editing by Richard Pullin)

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New York accuses Amazon of backsliding over worker safety, seeks monitor

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December 1, 2021

By Jonathan Stempel

NEW YORK (Reuters) -New York state’s attorney general on Tuesday asked a state judge to appoint a monitor to oversee worker safety at an Amazon.com Inc fulfillment center in New York City, citing the retailer’s alleged rollbacks of COVID-19 safety measures that were “already inadequate.”

Letitia James, the attorney general, also wants a court order requiring the rehiring of Christian Smalls, who Amazon fired for allegedly violating a paid quarantine by leading a March 2020 protest over conditions at the Staten Island facility.

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James, a Democrat running to become New York governor, sued https://www.reuters.com/article/us-amazon-com-complaint/new-york-attorney-general-sues-amazon-over-covid-19-shortfalls-idUSKBN2AH0C2 Amazon in February in a New York state court in Manhattan over its safety protocols for thousands of workers at the Staten Island facility and a distribution center in the New York City borough of Queens.

She said Amazon is valuing profit over safety and “acting as if the pandemic is over” by rolling back safety protocols even as the Omicron variant https://www.reuters.com/business/healthcare-pharmaceuticals/omicron-variant-could-outcompete-delta-south-african-disease-expert-says-2021-11-30 of the COVID-19 virus threatens to increase transmission rates.

The alleged rollbacks include making the Staten Island facility “mask-optional” for vaccinated workers while not requiring masks for unvaccinated workers, and failing to enforce social distancing.

In her motion for a preliminary injunction, James said the proposed monitor would oversee upgraded cleaning, hygiene and social distancing procedures.

“While case rates, hospitalizations, and deaths rise, Amazon rescinds protections and packs in more workers for its holiday rush,” James said in her motion. “Amazon’s ongoing – and worsening – failure to protect workers must be halted.”

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Amazon said in a statement it has taken a “comprehensive approach” to COVID-19 safety.

“It’s disappointing that the Attorney General is seeking to politicize the pandemic by asking for ’emergency’ relief now despite having filed this lawsuit nine months ago,” Amazon said.

The Seattle-based company is appealing a judge’s refusal in October to dismiss James’ lawsuit.

Amazon on Nov. 15 reached a separate settlement with California https://www.reuters.com/legal/government/amazon-settles-california-claims-it-concealed-covid-19-cases-workers-2021-11-15 over claims it violated a state “right-to-know” law by concealing from warehouse workers and local health agencies the numbers of workers being infected with COVID-19.

(Reporting by Jonathan Stempel in New York; Editing by Matthew Lewis and Stephen Coates)

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