FOREX TRADING

Inflationary Levels Subdued Over the Short Term, Rising on the Long Term

The cost of living in the U.S continues to rise on the long term whereas the yearly Consumer Price Index reported today about the month of December showed rising inflationary levels on the long term while on the short term it is still below the Fed’s target rate.

The Commerce Department report, Consumer Price index inclined in the month of December by 0.1% compared with the previous rise of 0.4% while markets were expecting 0.2%, while on the yearly scale the index rose by 2.7% compared with the previous 1.8% and the expected 2.8%.

As for the Core CPI; which excludes food and energy prices, the index rose during the same month by 0.1% compared with the previous flat reading and the expected 0.1%, while on the yearly scale the Core CPI dipped slightly to 1.7% which came in below the previous and the expected 1.8%.

Sub indices showed that Prices excluding food only rose by 0.1% from 0.5% throughout the month of December, while prices excluding Energy rose by 0.1% from the previous flat reading, meanwhile Energy prices rose by 0.2% compared with the month of November’s estimate of 4.1%, whereas the effect of rising oil prices throughout the past period helped energy prices to incline, not to mention the cold weather condition the U.S had over the past two months thus the index is expected to rise further in the upcoming reports.

Commodities prices rose by 0.2% compared with the previous 0.9%, whereas other goods and services inclined by 0.2% from the previous 0.4%, Gasoline prices rose in the month of December by 0.2% compared with previous rise of 6.4%.

Inflation over the short term is still subdued whereas economical conjecture and weak conditions continue to hammer down prices, not forgetting high unemployment along with tight credit conditions that suffocate spending, thus trimming off growth in the united states, we saw from earlier reports how high unemployment and tight credit conditions hammered down Retail Sales and force it to decline in the month of December which is a holiday season therefore inflation will take some time to materialize and start inclining on a gradual though fast pace.

The Federal Reserve projects that inflation will not exceed 2.0% over the upcoming two years, but investors worry about the affects of the huge liquidity that was pumped into markets along with rising oil prices could pressure prices to rise, not to mention the improvement in economical conditions throughout the past period which accompanied with the Fed projections of dropping unemployment will cause spending and demand to pick up by the final leg of this year therefore putting even more pressures on inflation to ascend in an uncontrollable way.

Therefore the upcoming period will witness fluctuations and confusing to investors where they will be focusing on any statement released by the Fed in order to sketch an outlook on the Federal Reserve benchmark interest rates and when will the Fed might start hiking rates in order to control inflation levels.

The outlook for inflation is still uncertain, unless the Federal Reserve favorite gauge for inflation; the Core PCE, confirms the outlook on the long term on rising inflationary levels therefore earlier statements of FOMC Members about low interest rates might be seen throughout the year 2010 will be put to the test as mounting pressures to start shifting the Bank’s monetary policy from a Hawkish stand to Dovish rises by time.

As for the manufacturing sector, the sector continue to walk on recovery lane whereas the Empire Manufacturing Index rose in the month of January by 15.92 beating market expectations of 12.0 and the previous revised 4.50 in the month of December.

Rising activity in the manufacturing sector indicates that demand is starting to incline in the world’s leading economy therefore more demand means more spending thus pressuring prices to incline and causing more worries on inflation in the United States. Investors fear that rising prices especially as energy prices continue to incline, will force the Federal Reserve to tighten its monetary policy, causing the economy to shrink and effect the recovery process where expectations shows that this year is considered a recovery year for the U.S economy in order to meet its long term growth potentials by the year 2011.

Ecpulse

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