Does the surprise June drop in UK CPI from 4.5 to 4.2% validate ...

Does the surprise June drop in UK CPI from 4.5 to 4.2% validate Bank of England's decision last Thursday not to raise its rates?

Compare that with ECB philosophy/decisions!!!

Does the Eurozone need a new (!!) central bank?

"With the unemployment rate above 9%, Fed officials are reluctant to boost its target for short-term rates" reports the WSJ.com in "ECB's Trichet Extends A Hand to Portugal", July 7, 2011.

Today, while the Bank of England kept its rate unchanged, in spite of inflationary pressures (yet very low growth) plus a very high (No. 1 in the EU) May 2011 (compared to May 2010) industrial producers prices hike, the European Central Bank raises its basis rate for a second time in 3 months. from 1.25% to 1.5%.

It seems that the Eurozone urgently needs a different central bank!!! One eg that, lie the Fed, cares about employment as much as it cares about inflation. The ECB seems too "dependent" on Bundesbank's preoccupation (or should one call it obsession) with inflation.

Note: While the Fed & the Bank of England have kept their recession rates of 0%-0.25% & 0.5% the ECB has raised its rate frm 1% to 1.5% in 3 mo

Industrial producer prices in April, Eurozone vs USA

In my June 7 post "What are the high Industrial Producer Prices in April (EU, Eurozone) a sign of?" I noted that according to Eurostat (June 6) in April 2011 compared with April 2010, industrial producer prices gained 6.7% in Eurozone and 7.8% in the EU! With UK, +13.1% in April, having the highest hike in the EU27!

Producer prices are an indication what the retail/consumer prices will look like a few months down the line. And of course they worry economists. Yet last Thursday, both the Bank of England and the ECB chose not to raise their interest rates (yet the ECB did raise its rate 2 months ago, from 1.00% to 1.25%).

For a wider picture see my post of June 10 "While the ECB and the Bank of England kept their rates stable: ECB, BoE and Fed, 3 different central banking philosophies".

Today, I decided to have a look at what is happening on other side of the Atlantic, in the USA.

I found a table: Producer Price Index, Industrial Commodities (1982=100) in PDF format at the site of the Bureau of Labor Statistics of the US Department of Labor (US Bureau of Labor Statistics, PPI Program, last update: May 12, 2011).

I note that the index for April 2011 is 203.9 whereas the index for April 2010 was 187.0. I assume that by the operation: (203.9-187.0)/(187.0 x 100) I can get a number that I can compared with the UK, Eurozone and EU ones. That number is: +9.04%

Assuming the above assumption is correct, then the Eurozone industrial producer prices hike in April 2011 (compared with April 2010), +6.7%, is quite lower than the US one, +9.04%. That seems to imply that inflationary pressures from industrial goods at the producer stage are less strong in the Eurozone than in the USA. But I am not an expert in those things.

But remember, the USD (Fed) rate is 0 to 0.25% and the Euro (ECB) one 1.25%. And that the Fed, like the Bank of England, and unlike the ECB, has to raised its rate for a long time!

By the way, the US April inflation year-on-year was 3.2% (see: Reuters, May 14) whereas the April one in the Eurozone was 2.8% and the flash estimate of the Eurostat for May is 2.7%. The 3.2% US inflation is the highest since October 2008.

The US GDP: Compared with the first quarter of 2010, US GDP in the 1st quarter of 2011 grew by 2.3% in the United States (source: Eurostat) while in the Eurozone and the EU it was 2.5%.

This is all, for now.
What do you make of all the above?

While the ECB and the Bank of England kept their rates stable: ECB, BoE and Fed, 3 different central banking philosophies?

Yesterday (June 9), both ECB (European Central Bank) and the Bank of England kept their "central" rates steady! But the difference between them is 75 basis points (Euro 1.25% vs Pound 0.5%, instead of the 50 that changed when the ECB raised its interest rate 25 basus points a couple of month ago (April 7) citing fears of inflationary pressures in the Eurozone (from global oil and food prices hikes).

For context read my post of April 7 2011: "Eurozone: That 2% obsession"!

Yesterday's respective decisions were made in the following context:

Eurozone:

1) 75/2011 - 31 May 2011
Eurostat May 31 release of its flash estimate for May 2011 annual inflation at 2.7%. Down 10 basis points from the 2.8% (annual) in April but way above the ECB's target of 2%.

2) Industrial producer prices in April up 6.7% compared with April 2010 (vs 7.8% in the EU)!

3) Second estimate (Eurostat, June 8) for the first quarter of 2011 GDP at +2.5% compared with the first quarter of 2010 (same rate for EU).

4) Seasonally-adjusted unemployment rate 9.9% in April 2011, same as in March (Eurostat, May 31)

UK:

1) Annual inflation rate in April at 4.5%, up from 4% in March.

2) Industrial producer prices in April up 13.1% compared with April 2010 (highest in the EU)

3) Second estimate (Eurostat, June 8) for the first quarter of 2011 GDP at +1.8% compared with the first quarter of 2010 (vs 2.5% in EU as a whole and in the Eurozone).

4) Unemployment rate for the three months to March 2011 7.7%

So the UK had a +1.8% growth (GDP) rate in Q1 vs 2.5% in the Eurozone but its unemployment situation is better than the Eurozone's (7.7% in the 3 months to March vs 9.9% in April) but its industrial producer prices is much higher than the Eurozone (13.1% vs 6.7% in April) and April inflation is 4.5% vs 2.7% in the Eurozone.

The Bank of England seems to have opted to resist the temptation to address the high inflation and industrial producer prices and did not "tighten" (ie raise interest rates, same 0.5% rate for 27 months in a row). In short it opted to growth and jobs (although jobless rate lower than Eurozone's) instead of inflation curbing.

That is the opposite than what the ECB had opted for 2 months ago! But then the ECB is only "responsible" for a 2%inflation target, not jobs or growth (as eg the Fed in the US that has kept is central interest rate at 0% to 0.25% for a long time now)!

And what is more, as BBC News reports "In his press conference, ECB president Jean-Claude Trichet pledged to exert "strong vigilance" on inflation, a signal to the markets that rates will be raised at the next meeting. "I would say... that it means that we are in a mode where there might be in the next meeting an increase of rates," he said. "But we are never pre-committed," he added."

Ouch! The ECB sounds like the Terminator robot in the well known series of films that only has one "directive" (order or goal): inflation minimisation. Unlike the Fed and the BoE decision yesterday.

What I do not understand is why the Pres of the ECB had to say anything re next months meeting and decision at all! Correct me if I am wrong, but the only thing the Bank of England "says" is to release, many days later, a record of the vote of its 9 member board.

Oh well.

Mind you, JC Junker, the Pres of the Eurogroup has taken the view (April 20, 2011) 'that "European leaders should discuss monetary policy in private talks", arguing that public discussions feed speculation'

And this week (June 6) Mr. Junker said that “European Central Bank President Jean-Claude Trichet’s proposal to create a euro-area finance ministry “‘won’t work.”". He was speaking to a European Parliament committee meeting and also said that "the euro area has no exchange-rate objective" adding that “I’m more inclined to think that we should have an exchange-rate policy".

"The euro is “rather overvalued” against other major currencies, he told the committee.
Some euro-area “member states see their life made difficult by the rather overvalued rate at the moment,” Juncker said." reports Bloomberg

Loyal readers of my blog know what my position is on these above issues!

More soon!

Notes:
1) See some economic theory re the 2% inflation target in my post: "Why a 2% inflation target for the Eurozone and other myths & realities!" (March 5, 2011)

2) I strongly recommend reading "Rethinking Macroeconomic Policy", by Olivier Blanchard, Giovanni Dell’Ariccia, and Paolo Mauro, Feb. 12., 2010.