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US Services PMI Falls Back

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US Services PMI Falls Back

Markit Economics have just published the preliminary Markit Services Purchasing Managers Index for the US for the month of April. This figure has come in at 54.2 down slightly on the March final number of 55.3 and also slightly behind the consensus estimate of 56.0.

As the US continues its successful climb out of recession there is a growing concern among commentators as to the ability to not only control but also to even predict the path of inflation.

Chief among those expressing concern is the Federal Reserve chair, Janet Yellen. The Fed chief is not the only central banker troubled by the ability to foresee price growth, several other members of the Federal Open Market Committee have backed Yellen’s recent comments regarding economists ability to predict price inflation.

Evolving inflationary conditions in various recovering global economies appear to be the catalyst for the Feds new found concerns. It is worth noting that the Fed predictions for price growth significantly undershot the actual outcome during the emergence of the US from its previous recession. On the flip side Japan seriously underestimated the lasting power of deflation during it’s recessionary emergence more than a decade ago. As an aside, this latter point is specifically relevant to the Eurozone as it now faces a starkly similar situation.

The Fed is pinpointing weaknesses in the current econometric models for predicting price growth. Typically an inflation model places substantial weight on unemployment factors, put simply unemployment implies slack in the economy that in turn subdues wages and therefore price rises. The problem that the Fed has is that this particular employment recovery is structurally unlike previous ones, it is regional in nature but more significantly the figures are skewed by the predominance of zero hour and part time contracts.

The Fed’s economists will have to work hard to find a more appropriate model for it’s inflationary predictions, in the meantime it is going to be difficult to rely on the forward price guidance.

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