US wholesale inflation hits 5-year record in Oct

Producer prices up

WASHINGTON, Nov 14, (AFP): Rising costs for services in October drove US wholesale inflation to its highest level in more than five years, according to government data released Tuesday.

The sign of robust price pressures in the pipeline suggests there may be light at the end of a long tunnel for the US central bank. Persistently weak inflation this year has left Federal Reserve policymakers at odds over how fast to raise interest rates amid a strong jobs market.

The Producer Price Index (PPI), which tracks changes in the costs of wholesale goods and services, rose 0.4 percent in October compared to the prior month, the Labor Department reported, handily beating analyst expectations for a rise of only 0.1 percent.

Year-over-year, however, the index rose 2.8 percent, its highest since February 2012 and well above the central bank’s two percent inflation target.

While the Federal Reserve focuses on a measure of consumer price inflation for its monetary policy decisions, a rising PPI could signal more normal price behavior is ahead if that passes through to retail prices.

Fed Chair Janet Yellen has admitted to some soul searching in the face of very tame inflation, which she says the central bank does not fully understand. Despite that uncertainty, market watchers widely expect the Fed to raise interest rates at its final meeting of the year next month. (Left to right): US Federal Reserve chief Janet Yellen, the President of the European Central Bank (ECB) Mario Draghi, Canadian Mark Carney, the governor of the Bank of England, and the governor of the Bank of Japan Haruhiko Kuroda attend a conference titled ‘Communications Challenges for Policy Effectiveness’ organised by the European

Central Bank (ECB) at the ECB headquarters in Frankfurt am Main, western Germany on Nov 14. (AFP) Chicago Federal Reserve Bank President Charles Evans on Tuesday became the second Fed policymaker in recent days to call for a new approach to rate-setting that would allow the central bank to respond to shocks when interest-rate cuts alone are not enough. One option is so-called price-level targeting, Evans said in remarks prepared for a European Central Bank conference in Frankfurt.

Under such a strategy, a central bank combats bouts of too-low inflation by allowing inflation to run too high for a time. Evans championed this policy in 2010 to deal with sagging inflation, but ultimately the Fed rejected such an “extreme” idea as too difficult to undertake during an economic crisis, Evans said on Tuesday.

Now that economic times are calmer, Evans said, the Fed can study and analyze this and other approaches, and prepare the public for their possible use in the next severe downturn if the Fed cuts rates to zero and still needs more firepower to get the economy growing again. Bouts of zero interest rates are likely to become more common in the future as potential economic growth slows, Evans and other Fed policymakers believe.

Last week, San Francisco Fed President John Williams embraced the idea of price-level targeting as a way to set rates in the future, though he too said such a shift would require plenty of study and debate.

Both men referenced the recent work of former Fed Chair Ben Bernanke, who last month argued for a framework where the Fed is to adopt price-level targeting on a temporary basis when rates became too low for conventional policy.

“My aim today is not to argue for state-contingent price-level targeting,” Evans said on Tuesday. “That may be a good way to go, but at this point I just don’t know. My point is that we should be planning for these inevitable future situations today.”

Evans cautioned that success of any new strategy hinges on the Fed delivering on its current policy goal of 2-percent inflation. (RTRS)