Comerica Economic Weekly

Prices and international trade were the important data points for the week, and both sets of data show the game-changing potential of energy in America’s economic future. Overall consumer prices for March were about as expected, increasing by 0.3 percent and breaking the short trend of higher monthly increases over the previous two months. February’s 0.4 percent gain was largely fueled by higher energy prices, which increased by 3.2 percent for that month. In March, energy prices gained just 0.9 percent despite larger price hikes at the gasoline pump. The core CPI increased by 0.2 percent in March and is up 2.3 percent over the past year. The producer price index for March was unchanged. The energy index for finished goods declined by 1.0 percent as seasonal adjustment factors drove petroleum prices down while unadjusted prices went up. Excluding food and energy, core PPI gained 0.3 percent in March. Over the past 12 months, the PPI for finished goods is up 2.8 percent, a significant improvement from the 7.1 percent year-over-year gain from last July. Relatively benign inflation readings, despite the recent run-up in crude oil prices, lower the bar for additional quantitative easing by the Federal Reserve.  Barring a change in geo-politics or a disaster, the inflationary push from higher oil prices is over, and it was not that large to begin with, held in check by mild weather and very low natural gas prices. That combination has proved to be a boon for many households over the winter heating season, resulting in very low utility bills. Overall consumer spending in 2012Q1 may be weaker than expected because of reduced household utility bills. The February international trade data showed an unexpected narrowing of the trade gap to -$46.0 billion. Exports increased by a slight $0.2 billion while imports contracted by a hefty $6.3 billion. The price-adjusted real balance of merchandise trade for February declined by $4.9 billion ($2005), showing that international trade may be less of a drag, or even a positive, for 2012Q1 GDP growth. The balance of trade in petroleum products for February was -$27.8 billion, about where it has been since January 2011. Over the long term, this negative balance has the potential to significantly narrow and even turn positive as U.S. natural gas and refined petroleum products are increasingly exported to an energy hungry developing world. The narrower-than-expected trade gap for February is an upside risk factor for 2012Q1 GDP growth and may mitigate the drag from weak consumer spending on household services.

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