Inflation Check !!!

US inflation reality check ahead?

Commodity prices are up 30% since March and crude oil prices have doubled since February, suggesting the deflation threat may have passed

US central bank officials are focusing their rhetoric on preventing a coming storm of inflation, but reports due this week could show that deflationary forces still pose a risk.

At the same time, an historic meeting of leaders from the four so-called Bric countries to discuss the global financial crisis, could stir up new jitters about the United States’ ability to fund massive budget deficits.

The longest US downturn since the Great Depression is likely to end soon, and expressing worries about inflation has become de rigueur - even while consumer prices are falling for the first time in decades.

Commodity prices are up 30% since March and crude oil prices have doubled since February, suggesting the deflation threat may have passed.

But some economists fear a deceleration of wage inflation in the United States, given forecasts for the ranks of the US unemployed to continue rising into 2010, with a potential jobless peak near 11% versus the current 9.4%.

Wage inflation is sometimes cited by the Federal Reserve as a relatively “sticky” indicator of price trends, compared with more transitory factors such as gasoline prices.

“Wage pressures are easing rapidly while firms’ pricing power remains limited,” said Anna Piretti, economist at BNP Paribas in New York. “It is still premature to put deflationary worries aside.”

Wage inflation tends to trough about 3 years after the onset of a recession, she said.

US producer prices for May, due on Tuesday, are forecast to be down by 4.4% on the year after tumbling by 3.7% in the year through April.

Then, in Wednesday’s May consumer price index report, the US Labour Department is expected to show that year-on-year prices fell 0.9% versus the 0.7% decline logged in April.

With inflation already so low, “the surge in unemployment could easily be big enough to push nominal earnings growth into negative territory,” Paul Ashworth and Paul Dales, economists at Capital Economics Ltd in London, said in a research report.

Brics flex their muscles

Before the inflation data hits, investors will focus on the first formal summit of the BRICs - Brazil, Russia, India and China - which each own vast amounts of US Treasury debt.

Leaders of the four nations meet in the Russian city of Yekaterinburg on Tuesday. Talks are expected to include the consideration of a potential supranational currency to undercut the importance of the US dollar.

The countries were lumped together by Goldman Sachs in 2001, when the investment bank speculated that the nations would be wealthier than most of the current major economic powers by 2050. For now, the BRICs account for about 15% of the global economy, and China alone accounts for half of that.

“These countries have very little in common except for the fact that they believe, to seemingly varying degrees of intensity, that they deserve greater influence in the conduct of world affairs,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York.

The grouping might be artificial, but the BRIC nations hope to flex their collective muscle on the world stage.

The BRICs tend to be on different sides of the fence on trade; Brazil and Russia typically gain from higher commodity prices, while India and China prefer lower prices.

Together, though, the bloc accounts for about one-third of the world’s currency reserves.

Many analysts think it is overly ambitious to expect them to reach a consensus, especially at their first summit, on paring their reliance on the US dollar.

Russia drove the value of the US dollar lower on 10 June by suggesting it plans to gradually cut the share of US Treasury debt in its $400 billion in reserves.

China also caused a storm in March with the suggestion that the US dollar could be replaced as the world’s major reserve currency. Chinese officials have since backed away from the concept.

So far, the much-feared reduction in demand for US government debt from China or others has not materialized.

That sentiment was reinforced by strong demand at last week’s US government debt auctions, which ranged from 3-year to 30-year on the maturity curve and totaled $65 billion.