Twenty Nine Million Unemployed or Underemployed, Inadequate Job Creation, Stagnating Real Disposable Income per Capita, Financial Repression and World Economic Slowdown with Global Recession Risk: Part II

 

Twenty Nine Million Unemployed or Underemployed, Inadequate Job Creation, Stagnating Real Disposable Income per Capita, Financial Repression and World Economic Slowdown with Global Recession Risk

Carlos M. Pelaez

© Carlos M. Pelaez, 2010, 2011, 2012

Executive Summary

I Twenty Nine Million Unemployed or Underemployed

IA1 Summary of the Employment Situation

IA2 Number of People in Job Stress

IA3 Long-term and Cyclical Comparison of Employment

IA4 Job Creation

IB Stagnating Real Wages

II Stagnating Real Disposable Income and Consumption Expenditures and Financial Repression

IIA Stagnating Real Disposable Income and Consumption Expenditures

IIB Financial Repression

III World Financial Turbulence

IIIA Financial Risks

IIIB Appendix on Safe Haven Currencies

IIIC Appendix on Fiscal Compact

IIID Appendix on European Central Bank Large Scale Lender of Last Resort

IIIE Appendix Euro Zone Survival Risk

IIIF Appendix on Sovereign Bond Valuation

IIIG Appendix on Deficit Financing of Growth and the Debt Crisis

IIIGA Monetary Policy with Deficit Financing of Economic Growth

IIIGB Adjustment during the Debt Crisis of the 1980s

IV Global Inflation

V World Economic Slowdown

VA United States

VB Japan

VC China

VD Euro Area

VE Germany

VF France

VG Italy

VH United Kingdom

VI Valuation of Risk Financial Assets

VII Economic Indicators

VIII Interest Rates

IX Conclusion

References

Appendix I The Great Inflation

IV Global Inflation. There is inflation everywhere in the world economy, with slow growth and persistently high unemployment in advanced economies. Table IV-1, updated with every blog comment, provides the latest annual data for GDP, consumer price index (CPI) inflation, producer price index (PPI) inflation and unemployment (UNE) for the advanced economies, China and the highly-indebted European countries with sovereign risk issues. The table now includes the Netherlands and Finland that with Germany make up the set of northern countries in the euro zone that hold key votes in the enhancement of the mechanism for solution of sovereign risk issues (Peter Spiegel and Quentin Peel, “Europe: Northern Exposures,” Financial Times, Mar 9, 2011 http://www.ft.com/intl/cms/s/0/55eaf350-4a8b-11e0-82ab-00144feab49a.html#axzz1gAlaswcW). Newly available data on inflation is considered below in this section. Data in Table IV-1 for the euro zone and its members are updated from information provided by Eurostat but individual country information is provided in this section  as soon as available, following Table IV-1. Data for other countries in Table IV-1 are also updated with reports from their statistical agencies. Economic data for major regions and countries is considered in Section V World Economic Slowdown following with individual country and regional data tables.

Table IV-1, GDP Growth, Inflation and Unemployment in Selected Countries, Percentage Annual Rates

	GDP	CPI	PPI	UNE
US	2.2	1.7	0.7	8.3
Japan	2.8	-0.2	-1.3	4.3
China	8.9	2.2	-2.1
UK	-0.8	2.4* RPI 2.8	2.3* output 2.0** input -2.3*	8.1
Euro Zone	-0.1	2.4	1.8	11.2
Germany	1.2	2.0	1.6	5.4
France	0.3	2.3	1.3	10.1
Nether-lands	-1.3	2.5	1.8	5.1
Finland	1.7	2.9	1.4	7.5
Belgium	0.5	2.2	2.6	7.2
Portugal	-2.2	2.7	2.7	15.4
Ireland	NA	1.9	2.4	14.8
Italy	-1.3	3.6	2.2	10.8
Greece	-6.2	1.0	3.1	NA
Spain	-0.4	1.8	2.5	24.8

Notes: GDP: rate of growth of GDP; CPI: change in consumer price inflation; PPI: producer price inflation; UNE: rate of unemployment; all rates relative to year earlier

*Office for National Statistics http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/june-2012/index.html **Core

PPI http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/june-2012/index.html

Source: EUROSTAT; country statistical sources http://www.census.gov/aboutus/stat_int.html

Table IV-1 shows the simultaneous occurrence of low growth, inflation and unemployment in advanced economies. The US grew at 2.2 percent in IIQ2012 relative to IIQ2011 (Table 8, p 27 in http://www.bea.gov/newsreleases/national/gdp/2012/pdf/gdp2q12_adv.pdf) See I Mediocre and Decelerating United States Economic Growth http://cmpassocregulationblog.blogspot.com/2012/07/decelerating-united-states-recovery.html and earlier http://cmpassocregulationblog.blogspot.com/2012/07/mediocre-economic-growth-united-states.html). Japan’s GDP fell 0.6 percent in IVQ2011 relative to IVQ2010 and contracted 1.8 percent in IIQ2011 relative to IIQ2010 because of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 but grew at the seasonally-adjusted annual rate (SAAR) of 7.8 percent in IIIQ2011, increasing at the SAAR of 0.1 percent in IVQ 2011 and 4.7 percent in IQ2012 (see Section VB at http://cmpassocregulationblog.blogspot.com/2012/06/mediocre-recovery-without-jobs_04.html); the UK grew at minus 0.7 percent in IIQ2012 relative to IQ2012 and GDP fell 0.8 percent in IIQ2012 relative to IIQ2011 (see Section VB and earlier http://cmpassocregulationblog.blogspot.com/2012/07/mediocre-economic-growth-united-states_03.html); and the Euro Zone grew at 0.0 percent in IQ2012 relative to IVQ2011 and fell 0.1 percent in IQ2012 relative to IQ2011 (see Section VD http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities_10.html and http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-06062012-AP/EN/2-06062012-AP-EN.PDF). These are stagnating or “growth recession” rates, which are positive or about nil growth rates instead of contractions but insufficient to recover employment. The rates of unemployment are quite high: 8.3 percent in the US but 17.9 percent for unemployment/underemployment or job stress of 28.6 million (see Table I-4 and earlier http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html http://cmpassocregulationblog.blogspot.com/2012/06/mediocre-recovery-without-jobs.html http://cmpassocregulationblog.blogspot.com/2012/05/recovery-without-jobs-twenty-eight.html http://cmpassocregulationblog.blogspot.com/2012/04/thirty-million-unemployed-or.html), 4.3 percent for Japan (see Section VB and earlier http://cmpassocregulationblog.blogspot.com/2012/07/mediocre-economic-growth-united-states_03.html), 8.1 percent for the UK with high rates of unemployment for young people (see the labor statistics of the UK in Subsection VH http://cmpassocregulationblog.blogspot.com/2012/07/world-inflation-waves-financial_22.html ) and 11.1 percent in the Euro Zone (section VD http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real_6867.html ). Twelve-month rates of inflation have been quite high, even when some are moderating at the margin: 1.7 percent in the US, -0.2 percent for Japan, 2.2 percent for China, 2.4 percent for the Euro Zone and 2.4 percent for the UK (see Section IV http://cmpassocregulationblog.blogspot.com/2012/07/world-inflation-waves-financial.html). Stagflation is still an unknown event but the risk is sufficiently high to be worthy of consideration (see http://cmpassocregulationblog.blogspot.com/2011/06/risk-aversion-and-stagflation.html). The analysis of stagflation also permits the identification of important policy issues in solving vulnerabilities that have high impact on global financial risks. There are six key interrelated vulnerabilities in the world economy that have been causing global financial turbulence: (1) sovereign risk issues in Europe resulting from countries in need of fiscal consolidation and enhancement of their sovereign risk ratings (see Section III http://cmpassocregulationblog.blogspot.com/2012/07/world-inflation-waves-financial.html); (2) the tradeoff of growth and inflation in China now with change in growth strategy to domestic consumption instead of investment and political developments in a decennial transition; (3) slow growth by repression of savings with de facto interest rate controls (see IIB and earlier http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html), weak hiring with the loss of 10 million full-time jobs (see Section I http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-hiring-ten-million.html) and continuing job stress of 24 to 30 million people in the US and stagnant wages in a fractured job market (see Section IB and earlier http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html); (4) the timing, dose, impact and instruments of normalizing monetary and fiscal policies (see IV Budget/Debt Quagmire in http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or.html http://cmpassocregulationblog.blogspot.com/2011/08/united-states-gdp-growth-standstill.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html http://cmpassocregulationblog.blogspot.com/2011/03/global-financial-risks-and-fed.html http://cmpassocregulationblog.blogspot.com/2011/02/policy-inflation-growth-unemployment.html) in advanced and emerging economies; (5) the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 that had repercussions throughout the world economy because of Japan’s share of about 9 percent in world output, role as entry point for business in Asia, key supplier of advanced components and other inputs as well as major role in finance and multiple economic activities (http://professional.wsj.com/article/SB10001424052748704461304576216950927404360.html?mod=WSJ_business_AsiaNewsBucket&mg=reno-wsj); and (6) geopolitical events in the Middle East.

In the effort to increase transparency, the Federal Open Market Committee (FOMC) provides both economic projections of its participants and views on future paths of the policy rate that in the US is the federal funds rate or interest on interbank lending of reserves deposited at Federal Reserve Banks. These projections and views are discussed initially followed with appropriate analysis.

The statement of the FOMC at the conclusion of its meeting on Aug 1, 2012, revealed the following policy intentions (http://www.federalreserve.gov/newsevents/press/monetary/20120801a.htm):

“Release Date: August 1, 2012

For immediate release

Information received since the Federal Open Market Committee met in June suggests that economic activity decelerated somewhat over the first half of this year. Growth in employment has been slow in recent months, and the unemployment rate remains elevated. Business fixed investment has continued to advance. Household spending has been rising at a somewhat slower pace than earlier in the year. Despite some further signs of improvement, the housing sector remains depressed. Inflation has declined since earlier this year, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee anticipates that inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.

The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”

There are several important issues in this statement.

1. Mandate. The FOMC pursues a policy of attaining its “dual mandate” of (http://www.federalreserve.gov/aboutthefed/mission.htm):

“Conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates”

2. Extending Average Maturity of Holdings of Securities. The statement of Apr 25, 2012, invokes the mandate that inflation is subdued but employment below maximum such that further accommodation is required. Accommodation consists of low interest rates. The new “Operation Twist” (http://cmpassocregulationblog.blogspot.com/2011_09_01_archive.html http://cmpassocregulationblog.blogspot.com/2011/09/collapse-of-household-income-and-wealth.html) or restructuring the portfolio of securities of the Fed by selling short-dated securities and buying long-term securities has the objective of reducing long-term interest rates. The FOMC is extending this program until the end of 2012.

3. Continuing Maturity Extension Program. This program is discussed in Section II Twist Again Extension (http://cmpassocregulationblog.blogspot.com/2012/06/recovery-without-hiring-continuance-of_24.html). The statement affirms: “The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.

4. Target of Fed Funds Rate. The FOMC continues to maintain the target of fed funds rate at 0 to ¼ percent.

5. Advance Guidance. The FOMC increases transparency by advising on the expectation of the future path of fed funds rate. This guidance is the view that conditions such as “low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”

6. Monitoring and Policy Focus. The FOMC reconsiders its policy continuously in accordance with available information: “The Committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”

Table IV-2 provides economic projections of governors of the Board of Governors of the Federal Reserve and regional presidents of Federal Reserve Banks released at the meeting of Jun 20, 2012. The Fed releases the data with careful explanations (http://www.federalreserve.gov/newsevents/press/monetary/20120620b.htm). Columns “∆% GDP,” “∆% PCE Inflation” and “∆% Core PCE Inflation” are changes “from the fourth quarter of the previous year to the fourth quarter of the year indicated.” The GDP report for IIQ2012 is analyzed in I Mediocre and Decelerating United States Economic Growth and the PCE inflation data from the report on personal income and outlays (http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html). The Bureau of Economic Analysis (BEA) provides the first estimate of IIQ2012 GDP with the second estimate to be released on Aug 29 (http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm). PCE inflation is the index of personal consumption expenditures (PCE) of the report of the Bureau of Economic Analysis (BEA) on “Personal Income and Outlays” (http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm), which is analyzed in this blog as soon as available (for the latest report for May see http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm and http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html). The next report on “Personal Income and Outlays” for Jun will be released at 8:30 AM on Jul 31, 2012. PCE core inflation consists of PCE inflation excluding food and energy. Column “UNEMP %” is the rate of unemployment measured as the average civilian unemployment rate in the fourth quarter of the year. The Bureau of Labor Statistics (BLS) provides the Employment Situation Report with the civilian unemployment rate in the first Friday of every month, which is analyzed in this blog (the Jun report is analyzed at http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html). The report for Jul will be released on Aug 3, 2012 (http://www.bls.gov/cps/). “Longer term projections represent each participant’s assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the economy” (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120620.pdf).

It is instructive to focus on 2012, as 2013, 2014 and longer term are too far away, and there is not much information on what will happen in 2013 and beyond. The central tendency should provide reasonable approximation of the view of the majority of members of the FOMC but the second block of numbers provides the range of projections by FOMC participants. The first row for each year shows the projection introduced after the meeting of Jun 20, 2012, and the second row “PR” the projection of the Apr 25, 2012 meeting. There are three major changes in the view.

1. Growth “∆% GDP.” The FOMC has reduced the forecast of GDP growth in 2012 from 3.3 to 3.7 percent in Jun 2011 to 2.5 to 2.9 percent in Nov 2011 and 2.2 to 2.7 percent at the Jan 25 meeting but increased it to 2.4 to 2.9 percent at the Apr 25, 2012 meeting, reducing it to 1.9 to 2.4 percent at the Jun 20, 2012 meeting.

2. Rate of Unemployment “UNEM%.” The FOMC increased the rate of unemployment from 7.8 to 8.2 percent in Jun 2011 to 8.5 to 8.7 percent in Nov 2011 but has reduced it to 8.2 to 8.5 percent at the Jan 25 meeting and further down to 7.8 to 8.0 percent at the Apr 25, 2012 meeting but increased it to 8.0 to 8.2 percent at the Jun 20, 2012 meeting.

3. Inflation “∆% PCE Inflation.” The FOMC changed the forecast of personal consumption expenditures (PCE) inflation from 1.5 to 2.0 percent in Jun 2011 to virtually the same of 1.4 to 2.0 percent in Nov 2011 but has reduced it to 1.4 to 1.8 percent at the Jan 25 meeting but increased it to 1.9 to 2.0 percent at the Apr 25, 2012 meeting, reducing it to 1.2 to 1.7 percent at the Jun 20, 2012 meeting.

4. Core Inflation “∆% Core PCE Inflation.” Core inflation is PCE inflation excluding food and energy. There is again not much of a difference of the projection for 2012 in Jun 2011 of 1.4 to 2.0 percent and the Nov 2011 projection of 1.5 to 2.0 percent, which has been reduced slightly to 1.5 to 1.8 percent at the Jan 25 meeting but increased to 1.8 to 2.0 percent at the Apr 25, 2012 meeting, reducing it to 1.7 to 2.0 percent at the Jun 20, 2012 meeting.

Table IV-2, US, Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents in FOMC, June 2012 and April 2012

	∆% GDP	UNEM %	∆% PCE Inflation	∆% Core PCE Inflation
Central Tendency
2012  Apr PR	1.9 to 2.4 2.4 to 2.9	8.0 to 8.2 7.8 to 8.0	1.2 to 1.7 1.9 to 2.0	1.7 to 2.0 1.8 to 2.0
2013  Apr PR	2.2 to 2.8 2.7 to 3.1	7.5 to 8.0 7.3 to 7.7	1.5 to 2.0 1.6 to 2.0	1.6 to 2.0 1.7 to 2.0
2014  Apr PR	3.0 to 3.5 3.1 to 3.6	7.0 to 7.7 6.7 to 7.4	1.5 to 2.0 1.7 to 2.0	1.6 to 2.0 1.8 to 2.0
Longer Run Apr PR	2.3 to 2.5 2.3 to 2.6	5.2 to 6.0 5.2 to 6.0	2.0 2.0
Range
2012 Apr PR	1.6 to 2.5 2.1 to 3.0	7.8 to 8.4 7.8 to 8.2	1.2 to 2.0 1.8 to 2.3	1.7 to 2.0 1.7 to 2.0
2013 Apr PR	2.2 to 3.5 2.4 to 3.8	7.0 to 8.1 7.0 to 8.1	1.5 to 2.1 1.5 to 2.1	1.4 to 2.1 1.6 to 2.1
2014 Apr PR	2.8 to 4.0 2.9 to 4.3	6.3 to 7.7 6.3 to 7.7	1.5 to 2.2 1.5 to 2.2	1.5 to 2.2 1.7 to 2.2
Longer Run Apr PR	2.2 to 3.0 2.2 to 3.0	4.9 to 6.3 4.9 to 6.0	2.0 2.0

Notes: UEM: unemployment; PR: Projection

Source: http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120620.pdf

Another important decision at the FOMC meeting on Jan 25, 2012, is formal specification of the goal of inflation of 2 percent per year but without specific goal for unemployment (http://www.federalreserve.gov/newsevents/press/monetary/20120125c.htm):

“Following careful deliberations at its recent meetings, the Federal Open Market Committee (FOMC) has reached broad agreement on the following principles regarding its longer-run goals and monetary policy strategy. The Committee intends to reaffirm these principles and to make adjustments as appropriate at its annual organizational meeting each January.

The FOMC is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decisionmaking by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society.

Inflation, employment, and long-term interest rates fluctuate over time in response to economic and financial disturbances. Moreover, monetary policy actions tend to influence economic activity and prices with a lag. Therefore, the Committee's policy decisions reflect its longer-run goals, its medium-term outlook, and its assessments of the balance of risks, including risks to the financial system that could impede the attainment of the Committee's goals.

The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances.

The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee's policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments. Information about Committee participants' estimates of the longer-run normal rates of output growth and unemployment is published four times per year in the FOMC's Summary of Economic Projections. For example, in the most recent projections, FOMC participants' estimates of the longer-run normal rate of unemployment had a central tendency of 5.2 percent to 6.0 percent, roughly unchanged from last January but substantially higher than the corresponding interval several years earlier.

In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee's assessments of its maximum level. These objectives are generally complementary.  However, under circumstances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate. ”

The probable intention of this specific inflation goal is to “anchor” inflationary expectations. Massive doses of monetary policy of promoting growth to reduce unemployment could conflict with inflation control. Economic agents could incorporate inflationary expectations in their decisions. As a result, the rate of unemployment could remain the same but with much higher rate of inflation (see Kydland and Prescott 1977 and Barro and Gordon 1983; http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html). Strong commitment to maintaining inflation at 2 percent could control expectations of inflation.

The FOMC continues its efforts of increasing transparency that can improve the credibility of its firmness in implementing its dual mandate. Table IV-3 provides the views by participants of the FOMC of the levels at which they expect the fed funds rate in 2012, 2013, 2014 and the in the longer term. Table IV-3 is inferred from a chart provided by the FOMC with the number of participants expecting the target of fed funds rate (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120620.pdf). There are 16 participants expecting the rate to remain at 0 to ¼ percent in 2012 and only three to be higher. Not much change is expected in 2013 either with 13 participants anticipating the rate at the current target of 0 to ¼ percent and only six expecting higher rates. The rate would still remain at 0 to ¼ percent in 2014 for six participants with five expecting the rate to be in the range of 0.5 to 1 percent and five participants expecting rates from 1 to 2.0 percent but only three with rates exceeding 2.0 percent. This table is consistent with the guidance statement of the FOMC that rates will remain at low levels until late in 2014.

Table IV-3, US, Views of Target Federal Funds Rate at Year-End of Federal Reserve Board Members and Federal Reserve Bank Presidents Participating in FOMC, June 20, 2012

	0 to 0.25	0.5 to 1.0	1.0 to 1.5	1.0 to 2.0	2.0 to 3.0	3.0 to 4.5
2012	16	3
2013	13	2	3	1
2014	6	5		5	3
Longer Run						19

Source: http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120620.pdf

Additional information is provided in Table IV-4 with the number of participants expecting increasing interest rates in the years from 2012 to 2015. It is evident from Table IV-4 that the prevailing view in the FOMC is for interest rates to continue at low levels in future years. This view is consistent with the economic projections of low economic growth, relatively high unemployment and subdued inflation provided in Table IV-2.

Table IV-4, US, Views of Appropriate Year of Increasing Target Federal Funds Rate of Federal Reserve Board Members and Federal Reserve Bank Presidents Participating in FOMC, June 20, 2012

Appropriate Year of Increasing Target Fed Funds Rate	Number of Participants
2012	3
2013	3
2014	7
2015	6

Source: http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120620.pdf

The Bureau of Economic Analysis (BEA) provides the annual revision of the national income and product accounts since Jan 2009 through May 2009 in the report on personal income and outlays for Jun 2012 released on Jul 31, 2012 (http://www.bea.gov/newsreleases/national/pi/2012/pdf/pi0612.pdf), including prices of personal consumption expenditures (PCE). There are waves of inflation similar to those worldwide (http://cmpassocregulationblog.blogspot.com/2012/07/world-inflation-waves-financial.html) in inflation of personal consumption expenditures (PCE) in Table IV-5. These waves are in part determined by commodity price shocks originating in the carry trade from zero interest rates to positions in risk financial assets, in particular in commodity futures, which increase the prices of food and energy when there is relaxed risk aversion. Return of risk aversion causes collapse in prices. The first wave is in Jan-Apr 2011 when headline PCE inflation grew at the average annual equivalent rate of 4.0 percent and PCE inflation excluding food and energy (PCEX) at 2.1 percent. The drivers of inflation were increases in food prices (PCEF) at the annual equivalent rate of 7.4 percent and of energy prices (PCEE) at 29.8 percent. This behavior will prevail under zero interest rates and relaxed risk aversion because of carry trades from zero interest rates to leveraged positions in commodity futures. The second wave occurred in May-Jun 2011 when risk aversion from the European sovereign risk crisis interrupted the carry trade. PCE prices increased 1.8 percent in annual equivalent and 2.4 percent excluding food and energy. The third wave is captured by the annual equivalent rates in Jul-Sep 2011 of headline PCE inflation of 2.4 percent with subdued PCE inflation excluding food and energy of 1.6 percent while PCE food rose at 6.2 percent and PCE energy increased at 13.6 percent. In the fourth wave in Oct-Dec 2011, increased risk aversion explains the fall of the annual equivalent rate of inflation to 0.8 for headline PCE inflation and 1.6 percent for PCEX excluding food and energy. PCEF of prices of food rose at the annual equivalent rate of 1.6 percent in Oct-Dec 2011 while PCEE of prices of energy fell at the annual equivalent rate of 13.5 percent. In the fifth wave in Jan-Mar 2012, headline PCE in annual equivalent was 3.2 percent and 2.4 percent excluding food and energy (PCEX). Energy prices of personal consumption (PCEE) increased at the annual equivalent rate of 21.3 percent because of the jump of 3.6 percent in Feb followed by 1.0 percent in Mar. In the sixth wave, renewed risk average caused reversal of carry trade with headline PCE inflation falling at the annual equivalent rate of 0.4 percent in Apr-Jun 2012 while PCE inflation excluding food and energy increased at the annual equivalent rate of 1.6 percent.

Table IV-5, US, Percentage Change from Prior Month of Prices of Personal Consumption Expenditures, Seasonally Adjusted Monthly ∆%

	PCE	PCEG	PCEG -D	PCES	PCEX	PCEF	PCEE
2012
Jun	0.1	-0.1	-0.1	0.2	0.2	0.2	-1.6
May	-0.2	-0.8	0.0	0.1	0.1	-0.1	-4.7
Apr	0.0	-0.3	-0.2	0.2	0.1	0.1	-1.8
∆% AE Apr- Jun	-0.4	-4.7	-1.2	2.0	1.6	0.8	-28.1
Mar	0.2	0.3	-0.1	0.2	0.2	0.1	1.0
Feb	0.3	0.6	0.0	0.2	0.1	0.0	3.6
Jan	0.3	0.3	0.1	0.2	0.3	0.1	0.3
∆% AE Jan- Mar	3.2	4.9	0.0	2.4	2.4	0.8	21.3
2011
Dec	0.1	-0.2	-0.2	0.2	0.2	0.2	-1.4
Nov	0.1	-0.1	-0.3	0.1	0.1	0.0	-0.5
Oct	0.0	-0.2	-0.1	0.1	0.1	0.2	-1.7
∆% AE Oct- Dec	0.8	-2.0	-2.4	1.6	1.6	1.6	-13.5
Sep	0.2	0.2	-0.4	0.1	0.0	0.5	1.5
Aug	0.2	0.3	-0.2	0.2	0.2	0.6	0.8
Jul	0.2	0.3	-0.1	0.2	0.2	0.4	0.9
∆% AE Jul-Sep	2.4	3.3	-2.8	2.0	1.6	6.2	13.6
Jun	0.1	0.1	0.2	0.1	0.2	0.3	-1.2
May	0.2	0.2	0.1	0.2	0.2	0.4	0.1
∆% AE May-Jun	1.8	1.8	1.8	1.8	2.4	4.3	-6.4
Apr	0.3	0.5	0.2	0.2	0.2	0.3	1.9
Mar	0.4	0.8	0.0	0.2	0.1	0.8	3.5
Feb	0.3	0.6	0.2	0.2	0.2	0.7	2.5
Jan	0.3	0.5	0.1	0.1	0.2	0.6	0.9
∆% AE Jan-Apr	4.0	7.4	1.5	2.1	2.1	7.4	29.8
2010
Dec	0.2	0.6	-0.4	0.0	0.0	0.2	4.2
Nov	0.1	0.2	-0.2	0.1	0.1	0.1	0.8
Oct	0.2	0.5	-0.2	0.1	0.1	0.2	3.1
Sep	0.1	0.2	-0.1	0.1	0.1	0.2	0.8
Aug	0.2	0.3	0.1	0.1	0.1	0.1	1.5
Jul	0.2	0.2	-0.3	0.1	0.1	0.1	1.8
Jun	0.0	-0.2	-0.3	0.1	0.1	-0.1	-1.0
May	0.0	-0.4	-0.2	0.2	0.1	0.2	-2.1
Apr	0.0	-0.3	-0.2	0.1	0.1	0.0	-0.8
Mar	0.2	-0.1	0.1	0.3	0.2	0.2	-0.6
Feb	0.1	-0.2	-0.3	0.2	0.1	0.1	-1.0
Jan	0.2	0.3	-0.1	0.2	0.1	0.1	1.8

Notes: percentage changes in price index relative to the same month a year earlier of PCE: personal consumption expenditures; PCEG: PCE goods; PCEG-D: PCE durable goods; PCES: PCE services; PCEX: PCE excluding food and energy; PCEF: PCE food; PCEE: PCE energy goods and services

Source: http://www.bea.gov/iTable/index_nipa.cfm

The charts of PCE inflation are also instructive. Chart IV-1 provides the monthly change of headline PCE price index. There is significant volatility in the monthly changes but excluding outliers fluctuations have been in a tight range between 1999 and 2012 around 0.2 percent per month.

Chart IV-1, US, Percentage Change of PCE Price Index from Prior Month, 1999-2012

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

There is similar behavior in the monthly fluctuations of the PCE price index excluding food and energy in Chart IV-2. The exclusion of commodity components does not eliminate negative changes. Fluctuations have been in a tight range from 0.0 percent to 0.4 percent, excluding a few outliers.

Chart IV-2, US, Percentage Change of PCE Price Index Excluding Food and Energy from Prior Month, 1999-2012

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

As with all commodity prices, oscillations of the PCE price index of food in Chart IV-3 are quite wide. Monetary policy of zero interest rates has caused trends of increase such as from 2007 into the global recession and in the current expansion phase after 2010 with interruptions by events of risk aversion.

Chart IV-3, US, Percentage Change of PCE Price Index Food from Prior Month, 1999-2012

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

The band of fluctuation of the PCE price index of energy in Chart IV-4 is much wider. An interesting feature is the abundance of negative changes.

Chart IV-4, US, Percentage Change of PCE Price Index Energy from Prior Month, 1999-2012

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Table IV-6 provides 12-month rates of PCE inflation. While headline PCE inflation has increased from 1.5 percent in Jan 2011 to 2.9 percent in Sep and Aug, declining to 1.5 percent in May and Jun 2012, PCE inflation excluding food and energy (PCEX), used as indicator in monetary policy, has increased from 1.1 percent in Jan 2011 to 1.9 percent in Dec 2011 and Jan and Feb 2012 with 2.0 percent in Mar 2012, 1.9 percent in Apr 2012 and 1.8 percent in May and Jun 2012, which is still below or at the tolerable maximum of 2.0 percent in monetary policy. The unintended effect of shocks of commodity prices from zero interest rates captured by PCE food prices (PCEF) and energy (PCEE) in the absence of risk aversion should be weighed in design and implementation of monetary policy.

Table IV-6, US, Percentage Change in 12 Months of Prices of Personal Consumption Expenditures ∆%

	PCE	PCEG	PCEG -D	PCES	PCEX	PCEF	PCEE
2012
Jun	1.5	0.4	-1.6	2.1	1.8	2.4	-3.7
May	1.5	0.6	-1.3	2.0	1.8	2.4	-3.3
Apr	1.9	1.6	-1.2	2.1	1.9	2.9	1.5
Mar	2.2	2.5	-0.8	2.1	2.0	3.2	5.4
Feb	2.4	2.9	-0.7	2.2	1.9	3.9	8.0
Jan	2.4	3.0	-0.5	2.2	1.9	4.6	6.8
2011
Dec	2.4	3.1	-0.5	2.1	1.9	5.1	7.4
Nov	2.6	4.0	-0.6	1.9	1.7	5.0	13.5
Oct	2.6	4.2	-0.5	1.8	1.6	5.2	15.1
Sep	2.9	4.9	-0.7	1.9	1.6	5.1	20.7
Aug	2.8	4.9	-0.4	1.8	1.6	4.8	19.8
Jul	2.8	4.8	-0.2	1.8	1.5	4.3	20.6
Jun	2.7	4.7	-0.4	1.7	1.4	4.0	21.6
May	2.6	4.5	-0.9	1.7	1.4	3.6	22.0
Apr	2.4	3.8	-1.2	1.6	1.2	3.2	19.4
Mar	2.1	3.0	-1.6	1.6	1.1	3.0	16.1
Feb	1.8	2.1	-1.6	1.7	1.2	2.4	11.5
Jan	1.5	1.3	-2.0	1.7	1.1	1.8	7.7
2010
Dec	1.5	1.1	-2.2	1.7	1.1	1.3	8.6
Nov	1.4	0.6	-2.0	1.7	1.2	1.3	4.4
Oct	1.5	0.8	-1.7	1.8	1.2	1.3	6.3
Sep	1.6	0.5	-1.3	2.1	1.5	1.2	4.1
Aug	1.7	0.6	-0.9	2.2	1.6	0.7	3.8

Notes: percentage changes in price index relative to the same month a year earlier of PCE: personal consumption expenditures; PCEG: PCE goods; PCEG-D: PCE durable goods; PCES: PCE services; PCEX: PCE excluding food and energy; PCEF: PCE food; PCEE: PCE energy goods and services

Source: http://www.bea.gov/iTable/index_nipa.cfm

The headline PCE index is shown in Chart IV-5 from 1999 to 2012. There is an evident upward trend with the bump of the global recession after IVQ2008.

Chart IV-5, US, Price Index of Personal Consumption Expenditures 1999-2012

Source: http://www.bea.gov/iTable/index_nipa.cfm

The headline consumer price index is shown in Chart IV-6. There is also an upward trend but with fluctuations and the 2008 bump.

Chart IV-6, US, Consumer Price Index, NSA, 1999-2012

Source: US Bureau of Labor Statistics

http://www.bls.gov/cpi/data.htm

The PCE price index excluding food and energy is shown in Chart IV-7. There is less pronounced long-term trend with fewer bumps because of excluding more volatile commodity items.

Chart IV-7, US, Price Index of Personal Consumption Expenditures Excluding Food and Energy 1999-2012

Source: http://www.bea.gov/iTable/index_nipa.cfm

The core consumer price index, excluding food and energy, is shown in Chart IV-8. There is also an upward trend but with fluctuations.

Chart IV-8, US, Consumer Price Index Excluding Food and Energy, NSA, 1999-2012

Source: US Bureau of Labor Statistics

http://www.bls.gov/cpi/data.htm

The PCE price index of food is shown in Chart IV-9. There is a more pronounced upward trend and sharper fluctuations.

Chart IV-9, US, Price Index of Personal Consumption Expenditures Food 1999-2012

Source: http://www.bea.gov/iTable/index_nipa.cfm

There is similar behavior in the consumer price index of food in Chart IV-10. There is an upward trend from 1999 to 2011 with a major bump in 2009 when commodity futures positions were unwound. Zero interest rates with bouts of risk aversion dominate the trend into 2011. Risk aversion softens the trend toward the end of 2011 and beginning of 2012.

Chart IV-10, US, Consumer Price Index, Food, NSA, 1999-2012

Source: US Bureau of Labor Statistics

http://www.bls.gov/cpi/data.htm

The most pronounced trend of PCE price indexes is that of energy in Chart IV-11. It is impossible to explain the hump in 2008 in the middle of the global recession without the carry trade from zero interest rates to leveraged positions in commodity futures. Risk aversion after Sep 2008 caused flight to the safe haven of government obligations. The return of risk appetite with zero interest rates caused a first wave of carry trades with another upward trend interrupted by the first European sovereign risk crisis in Apr-Jul 2010. Zero interest rates with risk appetite caused another sharp upward trend of commodity prices interrupted by risk aversion from the second sovereign crisis. In the absence of risk aversion, carry trades from zero interest rates to positions in risk financial assets will continue to cause distortions such as commodity price trends and fluctuations.

Chart IV-11, US, Price Index of Personal Consumption Expenditures Energy Goods and Services 1999-2012

Source: http://www.bea.gov/iTable/index_nipa.cfm

Chart IV-12 provides the consumer price index of energy commodities. Unconventional monetary policy of zero or near zero interest rates causes upward trends in commodity prices reflected in (1) increase from 2003 to 2007; (2) sharp increase during the global contraction in 2008; (3) collapse from 2008 into 2009 as positions in commodity futures were unwound in a flight to government obligations; (4) new upward trend after 2010; and (5) episodes of decline during risk aversion shocks such as the more recent segment during the worsening European debt crisis in Nov and Dec of 2011 and with new strength of commodity prices in the beginning of 2012 followed by softness in another episode of risk aversion.

Chart IV-12, US, Consumer Price Index, Energy, NSA, 1999-2012

Source: US Bureau of Labor Statistics

http://www.bls.gov/cpi/data.htm

Chart IV-13 of the US Energy Information Administration provides prices of the crude oil futures contract. Unconventional monetary policy of very low interest rates and quantitative easing with suspension of the 30-year bond to lower mortgage rates caused a sharp upward trend of oil prices. There is no explanation for the jump of oil prices to $149/barrel in 2008 during a sharp global recession other than carry trades from zero interest rates to commodity futures. Prices collapsed in the flight to government obligations. Risk appetite with zero interest rates resulted in another upward trend of commodity prices after 2009 with fluctuations during periods of risk aversion. All price indexes are affected by unconventional monetary policy.

Chart IV-13, US, Crude Oil Futures Contract

Source: US Energy Information Administration

Source: Energy Information Administration

http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=RCLC1&f=D

The producer price index of the euro zone fell 0.5 percent in both Jun and May 2012 after increasing 1.8 percent cumulative from Dec to Apr 2012 or at the equivalent annual rate of 4.4 percent, as shown in Table IV-7. Producer price inflation has moderated since May 2011. Energy inflation has oscillated with the shocks of risk aversion that cause unwinding of carry trade positions from zero interest rates to commodity futures. Energy prices fell 1.8 percent in Jun 2012, 1.4 percent in May 2012 and 0.2 percent in Apr 2012 after increasing 5.2 cumulative in Jan-Mar 2012 or at the annual equivalent rate of 22.4 percent. During periods of relaxed risk aversion, carry trades from zero interest rates to commodity exposures drive high inflation waves. Prices of capital goods have barely moved. Prices of durable consumer goods accelerated at annual equivalent rate of 3.2 percent in Jan-Mar 2012 but have been flat in every month from Apr to Jun 2012.

Table IV-7, Euro Zone, Industrial Producer Prices Month ∆%

	Jun 2012	May  2012	Apr  2012	Mar 2012	Feb  2012	Jan 2012	Dec  2011
Industry ex Construction	-0.5	-0.5	0.0	0.5	0.6	0.9	-0.2
Industry ex Construction & Energy	-0.1	0.0	0.2	0.2	0.3	0.3	-0.1
Intermediate Goods	-0.3	0.1	0.3	0.3	0.5	0.4	-0.2
Energy	-1.8	-1.4	-0.2	1.3	1.2	2.6	-0.5
Capital Goods	0.1	0.1	0.1	0.1	0.1	0.3	-0.1
Durable Consumer Goods	0.0	0.0	0.0	0.1	0.3	0.4	0.0
Nondurable Consumer Goods	0.1	-0.1	0.1	0.2	0.3	0.3	0.1

Source: EUROSTAT

http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database

Table IV-8, Euro Zone, Industrial Producer Prices 12-Month ∆%

	May   2012	Apr  2012	Mar 2012	Feb 2012	Jan 2012	Dec  2011	Nov 2011
Industry ex Construction	2.3	2.6	3.5	3.7	3.9	4.3	5.4
Industry ex Construction & Energy	1.1	1.3	1.6	1.7	2.0	2.5	3.0
Intermediate Goods	0.5	0.6	0.9	1.1	1.6	2.7	3.5
Energy	6.4	6.7	9.0	9.9	9.7	9.5	12.4
Capital Goods	1.2	1.2	1.2	1.2	1.3	1.4	1.4
Durable Consumer Goods	1.9	2.0	2.3	2.4	2.3	2.3	2.5
Nondurable Consumer Goods	1.9	2.3	2.8	3.0	3.1	3.3	3.6

Source: EUROSTAT

http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database

Twelve-month percentage changes of industrial prices in the euro zone have moderated significantly, as shown in Table IV-9. The 12-month percentage change of industrial prices excluding construction fell from 4.3 percent in Dec 2011 to 1.9 percent in Jun 2012. Energy prices increased 9.7 percent in Dec 2011 and Jan 2011 but the rate fell to 4.8 percent in the 12 months ending in Jun 2012. There is major vulnerability in producer price inflation that can return together with long positions in commodity futures with carry trades from zero interest during relaxation of risk aversion.

Table IV-9, Euro Zone, Industrial Producer Prices 12-Month ∆%

	Jun  2012	May   2012	Apr  2012	Mar 2012	Feb 2012	Jan 2012	Dec  2011
Industry ex Construction	1.8	2.3	2.6	3.5	3.7	3.9	4.3
Industry ex Construction & Energy	0.9	1.1	1.3	1.6	1.7	2.0	2.5
Intermediate Goods	0.1	0.5	0.6	0.9	1.1	1.6	2.7
Energy	4.8	6.3	6.7	9.0	9.9	9.7	9.7
Capital Goods	1.1	1.3	1.2	1.2	1.2	1.3	1.4
Durable Consumer Goods	1.9	1.9	2.0	2.3	2.4	2.3	2.3
Nondurable Consumer Goods	1.9	1.9	2.3	2.8	3.0	3.1	3.3

Source: EUROSTAT

http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database

Industrial producer prices in the euro area are following similar inflation waves as in the rest of the world (http://cmpassocregulationblog.blogspot.com/2012/07/world-inflation-waves-financial.html), as shown in Table IV-10. In the first wave in Jan-Apr 2011, annual equivalent producer price inflation was 12.0 percent driven by carry trades from zero interest rates into commodity futures. In the second wave in May-Jun 2011, annual equivalent producer price inflation declined at minus 1.2 percent. In the third wave in Jul-Sep 2011, annual equivalent inflation increased at 2.0 percent. In the third wave in Oct-Dec 2011, risk aversion resulting from the European sovereign debt crisis interrupted commodity carry trades, resulting in annual equivalent inflation of only 0.8 percent. In the fifth wave in Jan-Mar 2012, annual equivalent inflation jumped to 8.3 percent with a high annual equivalent rate of 9.4 percent in Jan-Feb 2012. In the sixth wave, risk aversion from the European sovereign debt event caused reversal commodity carry trades with equivalent annual inflation of minus 2.4 percent in Apr-May 2012. Producer price inflation in the euro zone excluding construction fell 0.5 percent in May and increased 2.3 percent in 12 months. The bottom part of Table IV-11 provides 12-month percentage changes from 1999 to 2010. The final row of Table IV-11 provides the average annual rate of producer-price inflation in the euro area at 2.6 percent in Dec from 1999 to 2011.

Table IV-10, Euro Area, Industrial Producer Prices Excluding Construction, Month and 12-Month ∆%

	Month ∆%	12-Month ∆%
Jun 2012	-0.5	1.8
May	-0.5	2.3
Apr	0.0	2.6
AE ∆% Apr-Jun	-3.9
Mar	0.5	3.5
Feb	0.6	3.7
Jan	0.9	3.9
AE ∆% Jan-Mar	8.3
Dec 2011	-0.2	4.3
Nov	0.3	5.4
Oct	0.1	5.5
AE ∆% Oct-Dec	0.8
Sep	0.3	5.8
Aug	-0.2	5.8
Jul	0.4	6.1
AE ∆% Jul-Sep	2.0
Jun	0.0	5.9
May	-0.2	6.2
AE ∆% May-Jun	-1.2
Apr	0.9	6.8
Mar	0.8	6.8
Feb	0.8	6.6
Jan	1.3	5.9
AE ∆% Jan-Apr	12.0
Dec 2010	0.8	5.4
Dec 2009		-2.9
Dec 2008		1.1
Dec 2007		4.7
Dec 2006		3.8
Dec 2005		4.5
Dec 2004		3.8
Dec 2003		0.8
Dec 2002		1.5
Dec 2001		-0.6
Dec 2000		4.6
Dec 1999		2.6
Average ∆% 1999-2011		2.6

Source: EUROSTAT

http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database

There are waves of inflation of producer prices in France as everywhere in the world economy (http://cmpassocregulationblog.blogspot.com/2012/07/world-inflation-waves-financial.html), as shown in Table IV-11. There was a first wave of sharply increasing inflation in the first four months of 2011 originating in the surge of commodity prices driven by carry trade from zero interest rates to commodity futures risk positions. Producer price inflation in the first four months of 2011 was at the annual equivalent rate of 11.4 percent. In the second wave, producer prices fell 0.5 percent in May and another 0.1 percent in Jun for annual equivalent inflation in May-Jun of minus 3.5 percent. In the third wave from Jul to Sep, annual equivalent producer price inflation was 2.8 percent. In the fourth wave Oct-Dec 2011, annual equivalent producer price inflation was 2.4 percent. In the fifth wave Jan-Mar 2012, average annual inflation rose to 8.3 percent during carry trades from zero interest rates to commodity futures. In the sixth wave in Apr-Jun 2012, annual equivalent inflation fell at the rate of 7.7 percent during unwinding of carry trades because of increasing risk aversion. The bottom part of Table IV-11 shows producer price inflation at 3.5 percent in the 12 months ending in Dec 2005 and again at 5.2 percent in the 12 months ending in Dec 2007. Producer prices fell in 2008 and 2009 during the global contraction and decline of commodity prices but returned at 5.4 percent in the 12 months ending in Dec 2010.

Table IV-11, France, Producer Price Index for the French Market, ∆%

	Month	12 Months
Jun 2012	-0.9	1.3
May	-1.0	2.2
Apr	-0.1	2.7
AE ∆% Apr-Jun	-7.7
Mar	0.5	3.8
Feb	0.8	4.2
Jan	0.7	4.2
AE ∆% Jan-Mar	8.3
Dec 2011	-0.2	4.6
Nov	0.4	5.6
Oct	0.4	5.7
AE ∆% Oct-Dec	2.4
Sep	0.3	6.1
Aug	0.0	6.2
Jul	0.4	6.3
AE ∆% Jul-Sep	2.8
Jun	-0.1	6.1
May	-0.5	6.2
AE ∆% May-Jun	-3.5
Apr	1.0	6.7
Mar	0.9	6.7
Feb	0.8	6.3
Jan	0.9	5.6
AE ∆% Jan-Apr	11.4
Dec 2010	0.8	5.4
Dec 2009	0.1	-2.9
Dec 2008	-1.5	-0.2
Dec 2007	0.6	5.2
Dec 2006	-0.2	2.9
Dec 2005	0.2	3.5

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=25&date=20120731

Chart IV-14 of the Institut National de la Statistique et des Études Économiques of France provides the behavior of the producer price index of France for the various segments: import prices, foreign markets, domestic market and all markets. All the components exhibit the rise to the peak in 2008 driven by carry trades from zero interest rates of unconventional monetary policy that was of such an impulse as to drive increases in commodity prices during the global recession. Prices collapsed with the flight out of financial risk assets such as commodity positions to government obligations. Commodity price increases returned with zero interest rates and subdued risk aversion. The shock of confidence of the current European sovereign risk moderated exposures to financial risk that influenced the flatter curve of France’s producer prices followed by another mild trend of increase and moderation in Dec 2011 and then renewed inflation in the first quarter of 2012 with a new pause in Apr 2012 and decline in May-Jun 2012.

Chart IV-14, France, Producer Price Index (PPI)

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=25&date=20120731

France’s producer price index for the domestic market is shown in Table IV-12 for Jun 2012. The segment of prices of coke and refined petroleum fell 7.7 percent Jun and increased 2.4 percent in 12 months. Manufacturing prices, with the highest weight in the index, fell 1.1 percent in Jun and rose 0.9 percent in 12 months. Mining prices were flat in the month and increased 4.0 percent in 12 months.

Table IV-12, France, Producer Price Index for the Domestic Market, %

Jun 2012	Weight	Month ∆%	12 Months ∆%
Total	1000	-0.9	1.3
Mining	130	0.0	4.0
Mfg	870	-1.1	0.9
Food Products, Beverages, Tobacco	188	0.3	2.0
Coke and Refined Petroleum	70	-7.7	2.4
Electrical, Electronic	92	-0.2	1.8
Transport	79	-0.1	1.1
Other Mfg	441	-0.6	-0.1

Source:  Institut National de la Statistique et des Études Économiques http://www.insee.fr/en/themes/info-rapide.asp?id=25&date=20120731

Italy’s producer price inflation in Table IV-13 also has the same waves in 2011 and into 2012 observed for many countries (http://cmpassocregulationblog.blogspot.com/2012/07/world-inflation-waves-financial.html). The annual equivalent producer price inflation in the first wave Jan-Apr was 10.7 percent, which was driven by increases in commodity prices resulting from the carry trades from zero interest rates to risk financial assets, in particular leveraged positions in commodities. In the second wave, producer price inflation was minus 0.2 percent in May and flat in Jun for annual equivalent inflation rate in May-Jun of minus 1.2 percent. In the third wave, annual equivalent inflation was 2.4 percent in Jul-Sep in a pause of risk aversion. With the return of risk aversion in the fourth wave coinciding with worsening sovereign debt crisis in Europe, annual equivalent inflation was 0.4 percent in Oct-Dec. Inflation accelerated in the fifth wave in Jan and Feb 2012 to annual equivalent 7.4 percent and annual equivalent of 6.6 percent in Jan-Mar. In the sixth wave, annual equivalent inflation in Mar-Apr was at 4.3 percent. In the seventh wave, risk aversion originating in world economic slowdown and financial turbulence softened carry trades with annual equivalent inflation falling to minus 2.4 percent in May-Jun 2012.

Table IV-13, Italy, Industrial Prices, Internal Market

	Month ∆%	12-Month ∆%
Jun 2012	-0.1	2.2
May	-0.3	2.3
AE ∆% May-Jun	-2.4
Apr	0.3	2.5
Mar	0.4	2.8
AE ∆% Mar-Apr	4.3
Feb	0.4	3.2
Jan	0.8	3.5
AE ∆% Jan-Feb	7.4
Dec 2011	0.0	3.9
Nov	0.3	4.7
Oct	-0.2	4.7
AE ∆% Oct-Dec	0.4
Sep	0.2	4.7
Aug	0.1	4.8
Jul	0.3	4.9
AE ∆% Jul-Sep	2.4
Jun	0.0	4.6
May	-0.2	4.8
AE ∆% May-Jun	-1.2
Apr	0.7	5.6
Mar	0.8	6.2
Feb	0.7	5.8
Jan	1.2	5.3
AE ∆% Jan-Apr	10.7
Dec 2010	0.7	4.7
Year
2011		5.0
2010		3.0
2009		-5.4
2008		5.9
2007		3.3
2006		5.2
2005		4.0
2004		2.7
2003		1.6
2002		0.2
2001		1.9

Source: Istituto Nazionale di Statistica

http://www.istat.it/it/archivio/68166

Chart IV-15 of the Istituto Nazionale di Statistica provides 12-month percentage changes of the producer price index of Italy. Rates of change in 12 months stabilized from Jul to Nov 2011 and then fell to 3.5 percent in Jan 2012 with increases of 0.8 percent in the month of Jan 2012 and 0.4 percent in Feb. Inflation was 0.4 percent in Mar 2012 and 2.8 percent in 12 months. The decline of annual equivalent inflation from 7.4 percent in Jan-Feb 2012 to 4.3 percent in Mar-Apr pulled down 12-month inflation to 2.8 percent in Mar and 2.5 percent in Apr. Percentage declines of inflation of 0.3 percent in May and 0.1 percent in Jun pulled down the 12-month rate of inflation to 2.2 percent in Jun 2012.

Chart IV-15, Italy, Producer Price Index 12-Month Percentage Changes

Source:  Istituto Nazionale di Statistica

http://www.istat.it/en/

Monthly and 12-month inflation of the producer price index of Italy and individual components is provided in Table IV-14. Energy prices fell 0.7 percent in Jun 2012 and rose 9.3 percent in 12 months. Producer-price inflation is positive for all components in the month of Jun with the exception of 0.2 percent in intermediate goods and 0.7 percent in energy. There is higher inflation in 12 months of 2.1 percent for nondurable goods than 1.8 percent for durable goods.

Table IV-14, Italy, Industrial Prices, Internal Market, ∆%

	Jun 2012/         May 2012	Jun 2012/         Jun 2011
Total	-0.1	2.2
Consumer Goods	0.1	2.0
Durable Goods	0.2	1.8
Nondurable	0.3	2.1
Capital Goods	0.2	0.6
Intermediate	-0.2	-0.4
Energy	-0.7	9.3

Source: Istituto Nazionale di Statistica

http://www.istat.it/it/archivio/68166

The first wave of commodity price increases in the first four months of Jan-Apr 2011 also influenced the surge of consumer price inflation in Italy shown in Table IV-15. Annual equivalent inflation in the first four months of 2011 was 4.9 percent. The crisis of confidence or risk aversion resulted in reversal of carry trades on commodity positions. Consumer price inflation in Italy was subdued in the second wave in Jun and May at 0.1 percent for annual equivalent 1.2 percent. In the third wave in Jul-Sep, annual equivalent inflation increased to 2.4 percent. In the fourth wave, annual equivalent inflation in Oct-Nov jumped again at 3.0 percent. Inflation returned in the fifth wave from Dec 2011 to Jan 2012 at annual equivalent 4.3 percent. In the sixth wave, annual equivalent inflation rose to 5.7 percent in Feb-Apr 2012. Inflation of consumer prices was flat in May with 3.2 percent in 12 months, 0.2 percent in Jun with 3.3 percent in 12 months and flat in Jul with 3.0 percent in 12 months in what could be yet another seventh wave with annual equivalent inflation at 0.8 percent in May-Jul 2012. Economies are shocked worldwide by intermittent waves of inflation originating in combination of zero interest rates and quantitative easing with alternation of risk appetite and risk aversion.

Table IV-15, Italy, Consumer Price Index

	Month	12 Months
Jul 2012	0.0	3.0
June	0.2	3.3
May 2012	0.0	3.2
AE ∆% May-Jul	0.8
Apr	0.5	3.3
Mar	0.5	3.3
Feb	0.4	3.3
AE ∆% Feb-Apr	5.7
Jan	0.3	3.2
Dec 2011	0.4	3.3
AE ∆% Dec-Jan	4.3
Nov	-0.1	3.3
Oct	0.6	3.4
AE ∆% Oct-Nov	3.0
Sep	0.0	3.0
Aug	0.3	2.8
Jul	0.3	2.7
AE ∆% Jul-Sep	2.4
Jun	0.1	2.7
May	0.1	2.6
AE ∆% May-Jun	1.2
Apr	0.5	2.6
Mar	0.4	2.5
Feb	0.3	2.4
Jan	0.4	2.1
AE ∆% Jan-Apr	4.9
Dec 2010	0.4	1.9
Annual
2011		2.8
2010		1.5
2009		0.8
2008		3.3
2007		1.8
2006		2.1

Source: Istituto Nazionale di Statistica

http://www.istat.it/it/archivio/68161

Consumer price inflation in Italy by segments in the estimate by ISTAT for Jul 2012 is provided in Table IV-16. Total consumer price inflation in Jul was 0.0 percent and 3.0 percent in 12 months. Inflation of goods was minus 0.4 percent and 3.8 percent in 12 months. Prices of durable goods fell 0.2 percent in Jul and increased only 0.9 percent in 12 months, as typical in most countries. Prices of energy goods fell 0.2 percent in Jul and increased 12.0 percent in 12 months. Food prices fell 0.9 percent in Jul and increased 2.6 percent in 12 months. Prices of services increased 0.7 percent in Jul and rose 2.0 percent in 12 months. Transport prices, also influenced by commodity prices, increased 1.4 percent in Jul and increased 3.6 percent in 12 months. Carry trades from zero interest rates to positions in commodity futures cause increases in commodity prices. Waves of inflation originate in periods when there is no risk aversion and commodity prices decline during periods of risk aversion.

Table IV-16, Italy, Consumer Price Index and Segments, Month and 12-Month ∆%

Jul 2012	Month ∆%	12-Month ∆%
Total	0.0	3.0
I Goods	-0.4	3.8
Food	-0.9	2.6
Energy	-0.2	12.0
Durable	-0.2	0.9
Nondurable	0.0	0.8
II Services	0.7	2.0
Housing	0.2	2.5
Communications	0.5	1.8
Transport	1.4	3.6

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/68161

Chart IV-16 of the Istituto Nazionale di Statistica shows moderation in 12-month percentage changes of the consumer price index of Italy that could continue in the beginning wave of declines of commodity prices.

Chart, IV-16, Italy, Consumer Price Index, 12-Month Percentage Changes

Source: Istituto Nazionale di Statistica

http://www.istat.it/en/

 

© Carlos M. Pelaez, 2010, 2011, 2012