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July 19, 2006
The Chairman Soothes, The Data Don't
Chairman Bernanke did his duty today, and completed his semi-annual discussion, on behalf of the Federal Open Market Committee, with the Senate Committee on Banking, Housing, and Urban Affairs. The market reviews were good. From the AP, via ABC News:
Wall Street shot higher Wednesday after Federal Reserve Chairman Ben Bernanke soothed investors with his view that economic growth seems to be moderating and inflation remains contained. The Dow Jones industrial average gained more than 220 points, while Treasury bonds recovered from early losses to close sharply higher.
Those early losses were due to the now-forgotten news of the day: The CPI report for June was not good, not good at all. Here's the short version:
Find any comfort there? Me neither. But wait. It gets worse. Here is the distribution of price changes (weighted, as usual, by expenditure shares):
So, just over 60 percent of weighted price changes have been rising at a annual pace in excess of 3 percent. And it ain't just energy:
Rent and owner's equivalent rent are certainly implicated...
... but together these components only represent about 30 percent of the CPI market basket.
These inflationary impulses may very well be temporary -- I'm still guessing they are -- but they are very definitely broad based.
UPDATE: Mr. Naybob agrees that the price pressures are broad-based, and implicates energy-price pass-through. But Brad DeLong might disagree with my assessment of the report, advertising the news as "A Slightly, Slightly Unfavorable CPI Report." But The Skeptical Speculator says the news was bad (and does its standard exemplary job of putting things in the context of the broader global context). Mark Thoma notes that the inflation reports are not helping the case for a pause in FOMC rate hikes. The Capital Spectator thinks the answer to whether yesterday's market optimism was warranted "awaits in the enxt CPI report."
On Mr. Bernanke's testimomy, Jim Hamilton views the comments as more optimistic than he expected, and more optimistic than he thinks warranted. Calculated Risk also expresses some skepticism about the Chairman's characterization of the country's economic health (here and here). Toni Straka was disappointed that there was no discussion of the nation's fiscal situation. Stock Trading Update advises that the Bernanke bounce is likely to be short lived.
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