Prices decline at a record pace in Japan

Japan’s struggle against deflation became ever more urgent as consumer inflation fell at a record pace last month. From Reuters:

“…The so-called “core-core” consumer price index, which strips out the effect of volatile food and energy costs, fell 1.2 percent last month from a year earlier after a 1.0 percent drop in November, data showed. It was the biggest since drop since the series began in 1970…”

Of course, there is now renewed speculation on yet another stimulus package, currency intervention, and other monetary action. With the national debt almost double GDP, Japan’s options are more limited than ever.

Standard and Poor lowered Japan’s credit rating outlook earlier this week. An actual rating cut may drive interest rates up and further constrain the government’s options. Daniel Fisher describes Japan’s dire debt and economic outlook in Forbes: “The Global Debt Bomb.”

Reuters provides a graphic comparing inflation rates amongst Japan, the Eurozone, and the U.S. Click here.

Phone companies jack up rates for basic phone service

David Lazarus of the L.A. Times:
AT&T customers saw their monthly rate for basic residential phone service jump 22% this month to $16.45. The increase followed a 23% rate hike last year.

And you know what? That’s the good news.

The bad news is that, beginning in January 2011, AT&T and other phone companies will be permitted to jack up basic rates as much as they want — no regulatory limits will apply.

Meanwhile, Verizon raised the price it charges for basic residential service last year to $19.91 monthly from $17.66, Lazarus reports.

Federal Reserves Inches Ever So Slowly Toward A Rate Hike

Given the political firestorm surrounding the confirmation for Federal Reserve Chairman Ben Bernanke, you can be excused from forgetting about the next monetary policy action and statement.

This latest release tempered signs of economic resuscitation with causes for concern. The end result is an expectation for a casual stroll toward a balanced economy:

“Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.”

The Federal Reserve also reminded us that the first of many emergency measures will shut down next week. The last measure will shut down on June 30th (the Term Asset-Backed Securities Loan Facility). These activities will finally set the stage for a rate hike at some point in the future…assuming of course the economy does not experience a relapse. The Federal Reserve also assured markets that rates will remain low for an “extended period.” Now that we know “extended period” means no sooner than six months, we should expect no rate hikes until after the end of all emergency financial measures.

This statement did contain one surprise. One of the voting members objected to the latest policy action:

“Voting against the policy action was Thomas M. Hoenig, who believed that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted.”

We have witnessed members of the Federal Reserve wonder aloud about the proper time to begin raising rates. However, this is the first time that a member has voted outright against the current fund rate policy. Consider this one more inch toward a rate hike.

TIPS indicate annual inflation expectations above 3% for next 5-10 years

In “Look to TIPS, Not Fed, for Inflation Tips“, the WSJ describes how current trading in Treasury Inflation-Protected Securities (TIPS) indicates inflation expectations running above 3% per year for the next 3-5 years. The WSJ uses the Fed’s “5yr5yr breakeven” method.

Full disclosure: long iShares Barclays TIPS Bond Fund (TIP)

AKS Steel Expects An Increase In Average Selling Price

AK Steel (AKS) fourth quarter and annual earnings this morning. The outlook for the first quarter includes an expected increase in average selling price of 3-4%. This price hike appears consistent with a recent series of price hikes from AKS (as reported here on Inflation Watch).

AKS returned to profitability in the third quarter of last year and expects to remain profitable in this year’s first quarter despite shipments remaining flat with fourth quarter levels.

Full disclosure: author intends to purchase AKS today

Drop in apartment construction may lead to shortages, big rent increases

Apartment rents have been falling. Vacancy rates are high. But how long will that last?  Steve Brown of the Dallas Morning News reports that we may soon be facing a shortage of apartments:

A dramatic decline in U.S. apartment construction could lead to a shortage of rental housing in the years ahead.

This year, developers are expected to start about 87,000 units – less than a third of what they build on average each year. And the outlook for 2011 isn’t much better.

“We will be facing a severe shortage of apartments in the next few years, which will increase the cost of housing for consumers,” Sharon Dworkin Bell, senior staff vice president of the National Association of Home Builders, said at this week’s convention in Las Vegas. “We believe we should have 300,000 starts every year to have a stable market.”

That’s not likely in the foreseeable future.

“We have a combination of limited supply coming on and increased demand when the economy recovers,” Bell said.

Michael Costa, a partner in McFarlane Costa Housing Partners of California, said, “We know that the demand for housing – especially rental housing – is going to be there. Each month we are not able to get our starts going, we fall further and further behind.”

At some point, a lack of rental units will take a bite out of consumers’ pocketbooks. “We are predicting now we may see upwards of double-digit rent increases,” Costa said.

Consequences of the Massachusetts vote

At Seeking Alpha, Bruce Krasting has interesting thoughts about last week’s vote in Massaachusetts. One of his points:

“I read the election result as being dollar positive. Somewhere inside this vote last night is a call for fiscal conservatism. We are going to hear rhetoric to that effect in the coming months and we will see legislative steps that at least give lip service to the idea that we ought to tighten our belt a few notches [emphasis added].”

I agree with Krasting that we will hear a lot more rhetoric about fiscal conservatism. I also agree that we will see legislative steps that give lip service to the idea of cutting spending.

However, I doubt any measures will emerge from Congress that go beyond rhetoric and lip service.

There are a couple of ways to look at the results from Massachusetts. The consensus view seems to be that voters there are fed up with Big Government approaches to policy problems. There is probably some truth in this, but I don’t know if that was the overriding factor. Consider:

1) Massachusetts already has universal health coverage and there is no effort there to repeal it.  Sen.-elect Scott Brown voted for this program and apparently has no regrets.

2) Nationwide, many elderly people oppose President Obama on health care reform because they don’t want Medicare cuts and they don’t want rationing of care (“death panels”).  They want Medicare to cover pretty much everything, regardless of cost-effectiveness (or lack thereof).  These voters are not calling out for limited government, but rather they support the status quo.

The real lesson of Massachusetts, I think, is that Medicare cuts and rationing based on cost-effectiveness analysis are extremely unpopular.

Pander Bear, ready to report for duty

I expect policymakers and politicians in both parties — from Fed officials to Congress to the President — to become even bigger Pander Bears than they already are (if that is possible). There will be plenty of rhetoric and lip service about the need to be fiscally responsible — that’s for sure — but  please don’t expect any real  spending cuts to materialize.

Eventually there comes a point when the lack of spending restraint will be inflationary. How long it will take to reach that point, nobody knows.

Update: The U.S. isn’t the only country with out-of-control finances.