Inflation in the 12 countries of the zone euro slowed for the second consecutive month in July as weak consumer demand seems to have deterred companies from passing on higher energy costs.

Details released today from the EU’s Eurostat show that consumer prices fell 0.2 percent in July, cutting the annual inflation rate for the zone to 2.3 percent from 2.4 percent in June. So for the moment, no inflation scare.

The curious number from my point of view is the stubbornly ‘high’ German rate of inflation, currently around 2%. I would have expected, given everything, inflation to be below 1% by now. Instead it’s Finland who mark the bottom: 0.2%.

The big question, of course, is which way do the numbers move now. This depends on whether the current ‘soft patch’ is simply a blip, or whether, as some are suggesting, the European recovery may have already been and gone.

Just a brief follow-up on yesterday’s post on Alan Greenspan. Sleeping on it I have the feeling that for blog posting I may suffer from the failing of trying to complicate things too much, or at least of trying to say too much at once.

Really there were two central themes, and since they are a little different from what most other commentators are saying it may be worth trying to drive them home.

The first point is perhaps best illustrated by this little extract from a Reuters article:

A Reuters poll of 20 of Wall Street’s top firms — primary dealers authorized by the Fed to deal directly in government securities markets — found all anticipate another quarter-percentage-point increase to 1.5 percent on Tuesday.

“Given the mind-set in the markets that another increase is coming, the Fed is unlikely to wish to disrupt that expectation at this stage,” said economist Lynn Reaser of Banc of America Capital Management Inc. in St. Louis, Missouri.

“There might in fact be a greater risk to the economy in the Fed’s holding back simply because to do so would raise questions about what does the Fed know about the expansion’s health,” she added.

Now Let’s be absolutely clear: this view is totally eroneous.
Continue reading →

Really it doesn’t seem to be such a big deal, to add or not to add (0.25% to the Federal Reserve’s overnight funds rate), and in some ways probably it isn’t. But at the same time I can’t help feeling that Sir Alan faces tomorrow one of the most difficult decisions of his whole term at the Federal reserve.

In fact the problem isn’t the quarter point rise, but the vision of the future movement of US interest rates that the Fed will offer tomorrow. A quarter point more or a quarter point less isn’t going to make or break any sophistocated economy (and anyway the important issue is going to be what is termed the yield spread, crudely the difference between the overnight funds rate and the rate on five and ten year US Treasury bonds, a measure which gives a lot more accurate picture of what people will have to pay to borrow money). Ideally Greenspan shouldn’t raise the rate at all tomorrow, but he has now probably boxed himself in too tightly to have the benefit of this leeway. Beyond this he needs to give a clear indication that there will not be any need for a vigorous raising of rates, not now, and not for some time to come.
Continue reading →

At the time of writing the Monetary Policy Committee of the Bank of England is busy deliberating as to whether to raise the base lending rate (currently at 4.5%). The consensus view is that the rate will go up a quarter point. Others speculate on a half percent rise (the National Institute of Economic and Social Research – NIESR – is even advocating this). Of course there is always the possibility that the rate will remain unchanged.

Whatever the speculation about the final decision, there is little mistaking the key factor in the decision: the Uk housing market. The centre of debate is really whether the UK housing market has peaked, or whether more rate raising is needed to bring the market back into line with reality. This is a classic bubble bursting situation.
Continue reading →

The Financial Times reports today on Deutsche Telekom’s first quarter results. The expected fall in the domestic fixed-line business was compensated for by a 12 per cent rise in revenues on the part of T-Mobile. A big part of this increase is due to the fact that they added a record 1.2m net new mobile subscribers in the US. Also helpful was their strong UK showing where they are now challenging to take the number one slot.

The one blemish on the report card: Germany. The fixed line T-Com section saw a 6% decline in sales, whilst T-mobile was reported as showing a disappointing drop in margins, “ascribed to one-off effects, increased marketing spend and the feeble German economy”.

“James Golob, an analyst at Goldman Sachs, said: “The mobile business accounts for nearly all of our medium-term earnings and sales growth forecasts – and, of that, half is related to the performance in the US.” The German mobile figures “raised concerns that the sudden drop in margins could represent a trend that could last for as long as the weakness in the German economy continues.””

Unfortunately, if I am right about the German economy, this means there could be a long, long wait ahead of us.