Core Inflation Takes A Breather

Posted on September 13, 2018 by Gemmer Asset

This morning the Bureau of Labor Statistics (BLS) released CPI inflation data. It showed that Core Inflation (ex-food and energy) grew +2.2% year-over-year. This is down from the +2.4% economists expected and is the first time since 2017 that a Core CPI data point was lower than the previous month.

 

 

At risk of getting too deep into the weeds, I’ll only mention that today’s number appears to be the result of one particular sector. The larger question is whether or not this is blip or the beginning of a trend. Here is Bloomberg’s take:

 

“While the moderation partly reflects a near-record 1.6 percent monthly drop in apparel prices, a component that tends to be volatile, the broader slowdown follows a surprise decline in producer prices and suggests the path of inflation could be softer than some people expect.”

 

Obviously, today’s number alone doesn’t make a trend, but it’s worth considering what data points like this mean for the Fed’s thinking. Carl Ricardonna, Bloomberg’s Chief US Economist put it well:

 

“This certainly will not impact the Fed’s rate decision later this month, but it could lead policy makers to avoid signaling a clear runway for December.”

 

So, there will still very likely be a hike in December (current odds are about 75%). A continuation of inflation data like today’s may just mean the path for 2019 rates becomes more uncertain.

 

Labor Market Remains Very Strong

 

Also released today were two labor market related data points: initial (or new) jobless claims and continuing claims – both of which measure people claiming unemployment benefits. Both numbers are the lowest they’ve been in nearly 50 years.

 

 

We summarized last week’s Jobs report here, highlighting both the better than expected payrolls number and the strong wage growth data.

 

Dual Mandate

 

The Fed’s mandate is twofold: 1) full employment and 2) stable prices. Full employment doesn’t mean everyone has a job. It means that employment is at a level that doesn’t cause excess inflation. Most economists agree that we’re either at or below that level. What’s likely driving the Fed’s current policy strategy is what’s going to happen with inflation. They simply don’t want to be in a position where they have to play catch up in the form of raising rates too quickly in order to stem the effects of runaway inflation.

 

Certainly, today’s inflation numbers aren’t at running away. But the tight labor market and recent wage growth numbers are likely top of mind for Chairman Powell when he considers the fact that one of his biggest responsibilities is ensuring stable future prices.

 

 

 

 

Published by Gemmer Asset Management LLC The material presented (including all charts, graphs and statistics) is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. The material is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objective, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this material is suitable for their particular circumstances and, if appropriate, see professional advice, including tax advice. The price and value of investments referred to in this material and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or prices of, or income derive from, certain investments. No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of Gemmer Asset Management LLC (GAM). Any mutual fund performance presented in this material are used to illustrate opportunities within a diversified portfolio and do not represent the only mutual funds used in actual client portfolios. Any allocation models or statistics in this material are subject to change. GAM may change the funds utilized and/or the percentage weightings due to various circumstances. Please contact GAM, your advisor or financial representative for current inflation on allocation, account minimums and fees. Any major market indexes that are presented are unmanaged indexes or index-based mutual funds commonly used to measure the performance of the US and global stock/bond markets. These indexes have not necessarily been selected to represent an appropriate benchmark for the investment or model portfolio performance, but rather is disclosed to allow for comparison to that of well known, widely recognized indexes. The volatility of all indexes may be materially different from that of client portfolios. This material is presented for informational purposes. We maintain a list of all recommendations made in our allocation models for at least the previous 12 months. If you would like a complete listing of previous and current recommendations, please contact our office.

 

Categories:

Bookmark and Share