Newsletter: Tame Inflation, Surging Coronavirus, German Stagnation


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The Price Is Right
U.S. inflation remains subdued. A key gauge of consumer prices—which excludes volatile food and energy components—climbed 2.3% from a year earlier in January, led by rising costs for housing and medical services. Will inflation remain tame? Ian Shepherdson, chief economist at Pantheon Macroeconomics, said housing and medical care would likely put upward pressure on core prices in the coming months: Those categories “have to be watched very closely. They are much more important than the prices of TVs and T-shirts.” Still, the larger inflation picture remained muted and officials at the Federal Reserve appear more concerned about soft than strong price gains, Amara Omeokwe reports.

Happy Valentine’s Day! Housing and medical aren’t the only sectors with some inflation pressure—and you might notice if you head out for a romantic dinner tonight. Restaurant prices climbed 3.1% in January from a year earlier, matching the fastest annual increase since 2009. That outpaced a 0.7% increase for dining at home and a 2.5% advance in overall prices for the same period. Food-industry analysts and restaurant executives cite the tight labor market as one key factor behind the run-up in restaurant prices. To attract scarce talent, restaurants are raising wages and then prices to compensate for it, Sarah Chaney and Heather Haddon report.

U.S. retail sales for January are expected to rise by 0.3% from the prior month. (8:30 a.m. ET)
U.S. import prices for January are expected to fall 0.2% from the prior month. (8:30 a.m. ET)
U.S. industrial production for January is expected to fall 0.3% from the prior month. (9:15 a.m. ET)
U.S. business inventories for December are expected to rise 0.1% from the prior month. (10 a.m. ET)
The University of Michigan preliminary consumer sentiment index for February is expected to tick down to 99.5 from 99.8 at the end of January. (10 a.m. ET)
Cleveland Fed President Loretta Mester speaks in Sarasota, Fla., at 11:45 a.m. ET.
The Baker Hughes rig count is out at 1 p.m. ET.
Coronavirus Watch
New cases of the coronavirus rose sharply after Chinese authorities changed the criteria for diagnosing the illness, raising questions about how soon the outbreak will peak. Epidemiologists, government officials and investors might now need to recalibrate their projections for the trajectory of a virus that remains little understood, Wenxin Fan, Natasha Khan and Chao Deng report.
China has pumped billions of dollars into its financial system, raised expectations of an interest-rate cut and pledged to cut red tape in a bevy of emergency responses to the economic hit of its coronavirus outbreak. But there is nothing typical about China’s coronavirus challenge, which economists say defies traditional prescriptions for dealing with an economic shock. The problem, experts say, is that regardless of consumer and corporate demand, a shortage of supply renders traditional stimulus measures powerless to address the problems weighing on the $14 trillion economy, James T. Areddy reports.
Moody’s Analytics: “The coronavirus has prompted us to revise down our baseline forecast for China. We now look for China’s GDP to have fallen 0.2% at an annualized rate in the first quarter, the first drop since the late 1980s. We expect that growth will bounce back in subsequent quarters as some of the lost output is recouped. Still, we have cut the forecast for GDP growth for 2020 and now look for it to rise 5.4%, compared with the 6.1% in the January baseline. Risks are still weighted to the downside.”

Flirting with Recession
Germany’s economy isn’t looking so hot. The federal statistics agency Destatis said gross domestic product in the fourth quarter of 2019 was unchanged from the previous quarter, weighed down by a struggling manufacturing sector. “The economy began this year with even less momentum than most had expected. We think the economy will continue to flirt with recession in the first half of this year,” said Capital Economics economist Andrew Kenningham.
Germany’s sluggish performance is dragging down the eurozone. The currency bloc’s fourth-quarter GDP advanced a mere 0.1% from the prior quarter, according to revised figures out Friday. That left full-year eurozone growth the worst since 2013. “We expect the same pace of growth in Q1 as disruptions due to the coronavirus derail the nascent industrial recovery,” economists at Oxford Economics said.

Trade Truce?
Huawei Technologies and two of its U.S. subsidiaries were charged with racketeering conspiracy and conspiracy to steal trade secrets in a federal indictment unsealed Thursday, opening another front in the Trump administration’s battle against the Chinese telecommunications firm. The new charges amp up pressure on Huawei, where Trump administration officials are fighting to persuade allies to lock the telecommunications giant out of their next generation mobile networks because of national security concerns, Corinne Ramey and Kate O’Keeffe report.
More fodder for trade fights: A new study from the White House said foreign governments are taking unfair advantage of American drug company research and U.S. consumers by artificially suppressing drug prices abroad. The findings suggest drug pricing could become another source of friction between the U.S. and trading partners, similar to China’s appropriation of U.S. intellectual property and European “digital taxes” on big American technology companies, Greg Ip reports.
Republican senators dealt a significant setback to one of President Trump’s nominees to the Federal Reserve Board when they raised concerns over her writings and public statements at a confirmation hearing Thursday. Lawmakers of both parties on the Senate Banking Committee said they were uncomfortable with at least some of Judy Shelton’s policy preferences. The former adviser to Mr. Trump’s presidential campaign has advocated for the Fed to reduce U.S. interest rates in response to rate cuts by other central banks and to prevent the U.S. dollar from strengthening, and has endorsed a return to the gold standard, Nick Timiraos and Sarah Chaney report.
“Nobody wants anybody on the Federal Reserve that has a fatal attraction to nutty ideas,” said Sen. John Kennedy (R., La.). “Now I’m not saying that’s the case here, but that was sort of the dialectic going on.”
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