Bernanke is in a box, and today’s jobs report shrank his wiggle room even further. The release from the Bureau of Labor Statistics is just the latest in a series of data points confirming the good news about the U.S. economic recovery. The BLS said that 192,000 nonfarm payroll jobs were added in February; even more encouraging, private sector employment was up 222,000, more than offsetting the loss of 30,000 government jobs.
This is how it is supposed to work. The government steps in to fend off a downturn, and then takes its foot off the petal as the private sector rebounds. Not everyone agrees.
There is no question our economy is gaining steam. According to the economic gurus at International Strategy & Investment (ISI), unemployment claims have “pulled away from the weak expansions that started in 1991 and 2002, and are now close to the strong expansion that started in 1983.” Claims fell to 368,000 this week, considerably lower than the 398,000 expected by most economists, and in line with quickening growth. Moreover, indicators of manufacturing activity (the PMI), vehicle sales and chain-store sales were also upbeat.
In spite of these cheerful indicators, and in the face of mounting concerns about inflation, Fed Chairman Ben Bernanke continues to press forward with his aggressive quantitative easing program, the so-called QE2. He has on more than one occasion tied his enthusiasm for the money flood to our high unemployment; with some gain on that front, the argument over when to pull back will intensify.
Comments made earlier this week by European Central Bank President Jean-Claude Trichet spotlighted Bernanke’s dilemma. Trichet surprised market analysts by suggesting that he might raise interest rates in April to prevent an inflationary spiral taking hold as a consequence of higher oil prices. The Euro bounced. In contrast, Bernanke dismissed inflation fears when he appeared before Congress this week. The dollar is currently valued around its three-month low.
The Eurozone is admittedly experiencing faster price increases than the U.S. The region’s purchasing price index jumped at an annual rate of 11 percent in January, and consumer prices increased at a rate of 2.4 percent in February. In the U.S., by contrast, the twelve-month hike in finished goods in January was 3.6 percent, and the latest CPI reading showed consumer prices edging up only 0.4 percent month-to-month. Still, last month’s PPI was 0.8 percent; annualized, that’s a rate of gain for finished goods of nearly 10 percent.
The pressure on Bernanke will mount. Though the overhang of unemployment means continued flattish labor costs (hourly wages are up only 1.7 percent year-over-year and were basically unchanged in February), prices of commodities ranging from copper to crude oil are soaring. It is impossible to imagine that increases in basic materials will not start to percolate through the economy.
Bernanke is in a tight spot. In 2005 and 2006, spikes in oil prices quickly translated into weakening retail sales. Abandoning easing today, just as the consumer confronts higher gasoline and heating oil prices, could undermine growth.
While he tries to balance these conflicting priorities, the Obama administration is also at risk. Nothing could undermine President Obama’s reelection prospects faster than rapidly escalating inflation – other than, perhaps, a double dip. My guess: Bernanke, who is first and foremost terrified of slipping into Japan’s no-growth sinkhole, will stick with QE2 beyond its due date, ushering in escalating price increases in 2012.
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