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March .2% Price Increase Hides Surprising Weaknesses

Tuesday April 15, 2014

$20 bill with bandaid

Now that the worst of the winter storms have passed, energy prices fell .1%, thus keeping the lid on inflation. In March, fuel oil costs were 2.9% lower, after rising 4.1% in February. This offset a 7.5% increase in natural gas prices, which drove electricity costs up 1.1%. Gas prices fell  a welcome 1.7%, as they did in February.

The prices of most other things rose moderately: Grocery prices were up .5%, while restaurant menu items rose .3%.  Used vehicles prices rose .4%, while new cars cost the same. Average service prices (including health care) rose .3%, as did the cost of shelter. However, the cost of medical equipment fell .3%.

On balance, inflation was .2%, according to the latest Consumer Price Index report. This is better than February's .1% increase, especially since it rose despite lower fuel costs.

The Federal Reserve looks at the core inflation rate because it take out monthly changes in gas and food prices. The Fed is more interested in price comparisons to last year which further removes seasonal variability. This critical rate remained at 1.7%, well below the Fed's 2% target. (Source: Bureau of Labor Statistics, Consumer Price Index, April 15, 2014)

How It Affects You

Once again, there is no threat of inflation. That means demand is still too sluggish to drive up prices. That's good for you, but economists would be happier with a little more inflation. That's because expectations drive demand in this way -- once people realize prices are going up in the future, they are more likely to buy things now to avoid paying the higher costs. This increases demand now, which drives business growth and ultimately jobs.

Anyway, that's how it's supposed to work in theory. In reality, businesses haven't been hiring full-time workers like they did in previous recoveries. As a result, there are far too many people working part-time that would prefer full-time, too many temporary workers, and too many who have been unemployed for too long.

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Why March 1.1% Retail Sales Growth Is Good, Not Great

Tuesday April 15, 2014

shoppers

Investors were relieved when retail sales rose a healthy 1.1% in March. Sales only rose a paltry .7% in February and fell .6% in January, thanks to brutal winter storms throughout much of the country. The improvement in March sales signals that shoppers are returning to stores as the weather improves.

Sales were boosted by a 3.1% increase in automobile and parts receipts. Growth in all other sectors a still-positive .7%.  The biggest gainers were : general merchandise (1.9%), building materials (1.8%), and online (1.7%). These offset big losses in electronics (-1.6%), gas stations (-1.3%) and general merchandise (-1.3%). (Source: U.S. Census Department, U.S. Retail Sales, April 14, 2014)

How It Affects You

Like everything else in the economic picture, retail sales is good not great. Yes, March was upbeat -- but it wasn't the huge rebound you'd expect once storms let up. Furthermore, much of it was auto sales, which are dependent on low interest-rate loans.

A true boost in consumer spending would also show up in sales dependent on credit cards and cash, as well. In other words, most families' incomes haven't rebounded enough to let them feel they can buy whatever they want. That will continue to put downward pressure on measures of economic growth, such as GDP.

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3 Ways Ukraine's Crisis Affects You

Monday April 14, 2014

ukraine soldier

Russia extended its grip over Ukraine this weekend, as camouflaged troops and local rebels took over city halls and police stations throughout the east. That area is home ethnic Russians who don't want to be part of the European Union. However, those Russians were moved there by Joseph Stalin 50 years ago to strengthen the Soviet Republic's hold on the area. (Source: BBC, Ukraine Crisis: What Is Happening Where?, April 14, 2014)

President Vladimir Putin denies his involvement. However, many small countries bordering Russia are now in fear of annexation. The EU is unlikely to defend them, since it depends on Russia for half of its gas. Many European businesses have profitable operations in Russia. Others sympathize with Putin, who is defending Russia's borders from encroachment by NATO.

The U.S. has already frozen assets and blocked visa for everyone who has "impeded democracy, contributed to violence or engaged in corruption in Ukraine." In addition, the U.S. Department of Energy is considering whether to lift bans on exports of natural gas to Europe. The U.S. will allow exports if Putin shuts off Russia's supplies to Europe and Ukraine.  Congress put together $1 billion in loan guarantees, further sanctions, and support for loans from the International Monetary Fund.(Source: CNN)

This follows Russia's annexation of the Crimean peninsula in March, which protects Russia's port access to the Black Sea. In addition, Crimea contains natural gas reserves, which Ukraine planned to develop in two years in a partnership with U.S. companies. If Ukraine did this, Russia lost one of its largest customers. However, annexation worries 260,000 Muslim Tatars in Crimea, who were subjected to ethnic cleansing during the Soviets rule. They were forced to move to Central Asia, where half of them died. Crimean Tatars peacefully supported Ukraine's Orange Revolution. ( Source: WSJ, Crimea's Tatars Try to Keep Their Resistance Peaceful, March 11, 2013; Fox Business News, Interview with former Georgia President Saakashvili, March 4, 2014)

Putin responded to the February 23 overthrow of Viktor Yanukovych, who was an ally. The pro-West faction of Ukraine's Parliament took over the government, setting up new elections for May 25, and installing Oleksandr Turchynov as the country's temporary leader.

The crisis occurred because Yanukovych mismanaged the budget, forcing Ukraine to ask for financial help. First, it appealed to the EU, then Russia. The political unrest occurred at this point, because those who want to be closer to the EU objected when that solution was abandoned. Russia's military strike support Yanukovych's return to Kiev and closer ties to Russia.

President Putin rejected a U.S. proposal to join a tri-partitie discussion between Russia, Ukraine and the EU. If Putin doesn't remove troops, Obama wants to impose the same economic sanctions that weakened Iran. Germany is not too keen on sanctions, since Europe imports much of its natural gas and oil from Russia. Secretary Kerry also mentioned ousting Russia from the Group of Eight.

Russia is one of the emerging markets that suffered a currency meltdown earlier this year. Forex traders abandoned these markets when the Federal Reserve began tapering its Quantitative Easing program, reducing credit around the world.

Russia waged wars in the past in Chechnya in the early 2000s. Putin annexed Ossetia in Georgia in 2008, and the Western world didn't really intervene. He also successfully launched a cyber-attack on Estonia. However, Ukraine is larger and borders the EU directly. (CNN, Interview with Chairman of House Intelligence Committee Mike Rogers (R-Mich.)

3 Ways It Affects You

  1. Gas prices rise -- Further volatility will drive up gas prices over the next few weeks.  Commodities traders are using this uncertainty as an excuse to boost oil prices, which they do every year at this time.
  2. Stock prices drop --The ongoing crisis will keep the selling pressure on Wall Street.  The stock market is already struggling with a 10% market correction.
  3. Inflation remains mild -- Investors will stick close to safe-haven assets like the U.S. dollar, Treasuries and gold.  The 10-year Treasury note yield will hover around 2.6%. That keeps interest rates low, and the dollar stable. Surprisingly, the euro is also becoming a safe-haven investment. As the dollar strengthens, it makes the prices of many imports lower. This may slow economic growth for this quarter, as a stronger dollar makes it more expensive for U.S. exporters.

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Why Is April 15 Tax Day?

Sunday April 13, 2014

income taxes

A reader asked why April 15 was chosen as tax day. Originally, back  in 1913, the deadline was March 1. That's because Congress passed the 16th Amendment, which created the income tax  on February 3, 1913. Congress gave everyone a year plus six weeks as the first deadline. The Revenue Act of 1918 moved the date forward to March 15. In 1955 some tax-code revisions pushed the date a month further, to April 15.

Why? The IRS said it "spread out the peak workload." It could also be because, as the middle class grew, the IRS had to issue more refunds. Pushing back the deadline allowed the Federal government to hold onto your money just a wee bit longer.  (Source: Jessica Sung, "Why Is April 15 Tax Day?" Fortune Magazine, April 15, 2002)

How It Affects You

Roughly half (48 million) of all 2013 tax filers didn't wait for the deadline. They filed early, and have received their refunds already. On average, they received more than $3,000, higher than the $2,800 average received last year.

Early filers are also more likely to file electronically (98% vs 80%) and use popular tax preparation software (45% vs 33%). They can even find discounts on tax prep software at sites such as AnyCodes.com.

Tax Freedom Day is April 18 this year. It is the first day in each year that Americans are not working just to pay taxes. It was five days later than last year. That's because Americans are paying more taxes thanks to an improving economy. Stronger growth generates higher incomes, and therefore higher income tax receipts.

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