U.S. PPI Total & Total Firm

Finished producer prices in the U.S. rose 0.3% during February following a 1.0% surge in January. The latest increase fell just short of Consensus expectations for a 0.4% rise but the 6.8% increase versus last February was near this cycle's high. Moreover it was well up from the 3.9% increase during all of last year.

Less food and energy the 0.5% increase in prices was quite a bit stronger than expectations for a 0.2% gain. While the y/y increase held roughly steady at 2.5% the annualized rate of growth during the last three months surged to 4.7%, about the fastest in ten years.

Energy prices rose 0.8% (20.7% y/y) and added to the prior month's 1.5% surge. Gasoline prices rose 2.9% for the second consecutive month (43.2% y/y) though home heating oil prices fell 3.7% (+36.8% y/y). Natural gas prices jumped 5.7% (5.3% y/y).

Why Do Gasoline Prices React to Things That Have Not Happened? from the Federal Reserve Bank of St. Louis is available here.

Finished consumer food prices fell 0.5% (+6.0% y/y) and gave back just a piece of the 1.7% January surge. During the past three months food prices have risen at a 10.8% annual rate.

Prices of core finished consumer goods rose 0.5% (2.5% y/y). That gain was well ahead of expectations for a 0.2% increase and it raised the three month change to 4.7% (AR). Passenger car prices rose 0.8% (1.2% y/y). Capital equipment prices rose a firm 0.5% (1.9% y/y) led by a 0.8% rise in prices of light trucks (0.1% y/y).

Intermediate goods prices rose 0.8% following the 1.4% January surge. Excluding food & energy prices were strong again and posted a 0.6% increase. Industrial chemical prices remained quite firm and rose 17.8% from last year.

The crude materials PPI surged again during February. A 3.7% rise followed the 2.5% jump during January. Crude energy materials prices jumped another 5.6% (30.2% y/y). The core crude materials PPI also was quite firm and posted a 3.3% gain. Prices for iron & steel scrap are up 34.5% y/y and copper base scrap prices are 25.1% higher y/y.

Housing starts during February were firmer than expected and fell just 0.6% to 1.065M units. A m/m decline to 0.96M had been the Consensus expectation. In addition, starts in January were revised higher to 1.065M from 1.012M reported last month.

As occurred last month, however, all of the strength relative to expectations (and most of the revision) was due to the multi-family sector. Starts of condos & coops during February rose 14.4% and January starts were revised higher by nearly one half million units.

Single family starts last month fell 6.7% m/m to .707M after a 3.1% January decline. That decline was revised to show less of a decline. Single family starts in February were at their lowest level since January 1991 and since the peak in early 2006, starts of single family homes were down 61.5%.

By region, single family starts in the Northeast gave back all of the January increase with a 42.3% decline (-28.9% y/y). In the Midwest single family starts fell to the lowest level since (this is not a typo) early 1985 and were down 25.0% y/y. In the South, single family starts fell 7.0% (-42.5% y/y) and out West single family starts rose by nearly one-third m/m but still were down by nearly one-half from February 2007.

Building permits continued the slide from a 2005 peak with a 7.8% m/m drop. Single-family permits fell 6.2% (-41.9% y/y).

Understanding the Securitization of Subprime Mortgage Credit from the Federal Reserve Bank of New York can be found here.

For last week, the International Council of Shopping Centers ICSC-UBS Chain Store survey indicated that chain store sales rose 0.4% and added to the prior week's 0.3% rise. The increases raised the average level of sales so far this month 0.2% from February after that month's 0.4% increase.

The ICSC-UBS retail chain-store sales index is constructed using the same-store sales (stores open for one year) reported by 78 stores of seven retailers: Dayton Hudson, Federated, Kmart, May, J.C. Penney, Sears and Wal-Mart.

Today, the Federal Open Market Committee lowered the Federal funds rate by 75 basis points to 2.25% in a move that was somewhat more aggressive than generally expected. The funds rate was last this low early in 2005 and it was the largest cut since this past January.

The discount rate was lowered another 75 basis points to 2.5% after this weekend's cut from 3.5%.

The Fed indicated that "the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters."

The Fed further indicated that "Today’s policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain."

Voting against taking the action was Richard W. Fisher, President of the Federal Reserve Bank of Dallas and Charles I. Plosser, President of the Philadelphia Fed, who preferred less aggressive action at this meeting.

For the complete text of the Fed's latest press release please follow this link.

Market Bailouts and the "Fed Put" from the Federal Reserve Bank of St. Louis can be found here.

Booms and Busts: The Case of Subprime Mortgages from the Federal Reserve Bank of Kansas City is available here.

Italy’s export and import rise in January and continue to show good momentum despite forecasts of slowing in the Euro Area and a continually rising euro. While MFG readings have showed slowing the export picture remains surprisingly strong.

After declines in the year ago period Italy’s exports have come back to life with strong growth across the export categories. Capital goods exports remain especially strong. On the import side growth has also been quite strong. Year over year both export and imports up by just about 10%.

However the chart provides a different perspective. Despite all the solid growth rates the time series of Yr/Yr growth rates shows that apart from a sharp drop and recovery over the past year Italy’s export and import Year-over-year growth rates are still locked in a broad declining trend.

With turmoil in world financial markets and slowing economies, monetary authorities in some of the countries that have been targeting inflation may find the "target" too restrictive.

The release of inflation data in the United Kingdom and Canada today illustrates two different cases. In the United Kingdom where inflation is increasing and economic conditions deteriorating, inflation targeting may be relaxed. In Canada where inflation is falling, weakening demand can be addressed by easier monetary policies without fear of setting off an inflationary spiral.

In the UK, where the base interest rate is 5.25%, a reduction in the rate would ordinarily be likely in view of the slowing economy. However, inflation has been creeping up since a low of 1.75% was reached last August. It was 2.51% in February, the highest since June of last year and well above the Bank of England's target rate of 2%. On the other hand, Core inflation, defined as total excluding energy, food, alcoholic beverages and tobacco, has been declining over the same period and is now 1.17%. Overall inflation and core inflation in the UK are shown in the first chart. The better performance of the core relative to total inflation may influence the Monetary Policy Committee against raising interest rates and may even pave the way for a cut. The next meeting of the Monetary Policy Commission of the Bank of England will be on April 10th.

The Bank of Canada reduced its base rate by 50 basis points to 3.5% on March 4, 2008. At that time the Bank suggested that further monetary stimulus might be required. It is unlikely that monetary policy in Canada in the coming months will be restrained by inflation considerations. Inflation has been declining since November and was 1.8% in February. below the Bank of Canada's target rate of 2%. Although core inflation, defined as total inflation less 8 volatile items and indirect taxes, increased from 1.38% in January to 1.47% in February it was the first increase in core inflation since June, 2006 and the level is still relatively subdued. Overall inflation and core inflation in Canada are shown in the second chart. The next interest rate announcement by the Bank of Canada will be on April 22, 2008.