The general consensus amongst economists is that US inflation is low. This was corroborated by favorable reports by the Department of Labor at the beginning of May. Yet, what trajectory will inflation take in the next half-decade? In this article, 5 experts weigh in on where US inflation is heading in the next 5 years.
The Fed Does Not Expect Inflation To Rise Significantly
“Inflation management is one of the primary roles of the Federal Reserve, so you can look to them for indications of inflation expectations.
The Fed will raise interest rates when it expects inflation to get above the 2% target. By raising interest rates, the Fed makes borrowing less attractive so spending and inflation will fall. Most recently, the Fed has announced that they do not plan to raise interest rates through 2021. This means that they do not expect inflation to rise significantly.
The Fed has also said they expect for unemployment to increase slightly. Again, this indicates low inflation. If less people are employed, then less people will have money to spend and create that upward pressure on prices that causes inflation.”
Brandon Renfro, Professor, Financial Planner
Not Much Organic Inflation
“Speaking as a consumer I do not believe there will be much ‘organic inflation’ in the next five years. A lot of people never fully recovered from the Great Recession. They’re saving a little bit more and do not fully trust the recovery. In addition the baby boomers are all approaching retirement age and will be living on fixed incomes. Healthcare costs are a major concern. According to statistics the economy is booming and yet a lot of people do not feel that is the case in their personal life.
Many people are working in Gig Economy jobs, which are in essence temporary assignments with no health benefits. Examples include driving for Uber, Lyft, Grub Hub, Door Dash, or Amazon delivery. These are not the type of positions, which fueled the economy in past generations.
Inflation is generally caused by consumers pumping a lot of money into the economy and taking on large amounts of debt. The wounds of the Great Recession have yet to heal. People are not automatically assuming they will be better off a year from now. Whenever one feels uncertain about the future they are reluctant to spend lavishly. Any spending they do is usually measured.
Having said that world affairs such as tariff wars and instability in the Middle East could cause inflation without any assistance from consumers. A major rise in oil costs could ripple through the economy causing prices to rise in other sectors of the economy. However, fear has a way of causing people to spend even less which leads to higher unemployment and recession. That would eliminate any inflation bubble.
We’re not likely to see any real inflation until the average working person believes the backbone of the economy is solid with good paying jobs. Right now adults are taking jobs from teenagers such as delivering newspapers, cutting lawns, snow removal, and working in fast food restaurants. This explains why there is a sudden push to make the minimum wage $15. We may not see historically high inflation for another 10 years!”
Kevin Darné, Author, Continuing Education Instructor
Rates Must Creep Back Up To Historic Levels
“Where’s US inflation heading in the next 5 years? – This is impossible to pin down precisely, but I believe that short of a recession, rates must creep back up to historic levels.
In spite of trade wars, government shutdowns and the resultant delay in statistics, the business cycle goes on. That said, corporations have used all the cost-cutting tricks in the world. Now is the time for increasing prices on the ground level as well as at the Fed Open Market Committee.
Complicating matters is that persistently low inflation and low rates hamstring the options that central banks have historically used to address crises. Again, in order to relieve this psychological pressure rates and inflation must creep up.”
Robin Lee Allen, Managing Partner, Esperance PE
A Modest Stagnation Of Growth Rates Can Be Expected
“Considering the latest development in trade and monetary policy, it can be expected that the U.S. inflation rate will remain at modest levels.
Given the uncertain outcome of the ongoing trade war, as well as highly leveraged corporate debt levels, which weigh on the outlook of the world economy, a modest stagnation of growth rates can be expected.
Another point to consider is the Fed’s shift in interest rate expectations. The expected monetary easing is an indication of concerns about low growth and geopolitical tensions.
Since the conundrum about the missing effect of the last quantitative easing programs still prevails, especially the question why full employment did not yield to higher inflation, it remains at least questionable if another round of quantitative easing would lead to higher inflation. The Federal Reserve Bank of St. Louis 5-Year Forward Inflation Expectation Rate (T5YIFR) dropped in the last year from 2.16% to 1.94% and from 2.47% to 1.94% within the last 5 years, even though the Fed deployed massive quantitative easing programs.”
Dr. Stephan Unger, Assistant Professor of Economics, Saint Anselm College
A Recession Within The Next 5 Years
“I predict inflation will stay around 2% for the next 3 years unless a recession hits sooner in which case I think the government will print more money and drive up inflation at a drastic rate. I think there will be a
recession within the next 5 years, so when that hits inflation may be as high as 10% in just one year.”
Stacy Caprio, Financial Blogger, Fiscal Nerd
Given economic indicators, the Fed has projected that there will be no real threat of skyrocketing inflation in the coming years. However, there are numerous variables that can shift which would alter that forecast. Ultimately, only time will provide the definitive answer.
Inflation and deflation can have a significant impact on the performance of a portfolio. It is crucial for investors to understand investment strategies to weather these two economic factors. In this article, experts provide valuable tips and insight into what investors need to know when investing during inflation and deflation.
Avoid Having High Cash Balances
“A top rule for investing during inflation is to avoid having high cash balances. Since money loses it’s purchasing power during such phases, investors should aim at investing into assets which are immune against devaluation, such as physical goods, e.g. gold, silver, other commodities, real estates, etc.
But also an investment into stocks would be good advice since stock prices tend to increase in times of inflation. The reason is that investors flee out of cash and are looking for any types of investment.
In times of deflation, investors should consider to hold cash and to invest in bonds, especially long-term bonds, since interest rates are likely to decline and therefore bond prices.”
Stephan Unger, assistant professor of economics, Saint Anselm College
Utilize The Power Of Diversification
(Credit: Richmond Quantitative Advisors)
“The above illustration details global asset classes that tend to outperform during rising inflation and falling inflation. You can further delineate if the economy is in a declining stage or growth stage to provide four full quadrants of global asset performance.
The four quadrants include:
* Inflation with Growth – Inflationary Boom
* Inflation with declining Growth – Inflationary Stagnation
* Deflation with Growth – Deflationary Boom
* Deflation with declining Growth – Deflationary Bust
Based on the illustration, there are ways to position one’s portfolio for certain environments the US encounters. The main focus for investors should be to utilize the only free lunch in investing which is the power of diversification. By diversifying across assets within these four quadrants, one has the highest likelihood of weathering the storm (even if it is not clear where it may occur across the quadrants). Investors need to know those asset classes that have the ability to outperform in each quadrant and then assess their personal asset allocation decisions accordingly.”
Andrew S. Holpe, Managing Member, Richmond Quantitative Advisors
Investors Need To Generate After-Tax Returns
“Most people create investment portfolios to invest their assets to outpace the rate of inflation. The financial markets and governments prefer an environment with low, controllable inflation growth. These conditions allow for expansion while enabling governments to repay current debt with future-value currency.
According to Morningstar, a consensus of financial analysts predict that long-term inflation will grow at 2.48% per annum. Simply put, an investor needs to generate an after-tax return above this inflation rate to stand still and protect the purchasing power of their money.
The most prudent way to ensure success is to build a highly diversified portfolio of stocks, bonds, real estate, commodities, and cash-like liquidity. Limit your single-name stock concentration per issue to not more than 5%. Construct a bond portfolio focusing on credit-quality and that the current yield of your bond portfolio exceeds the effective duration of your portfolio. Effective duration is the sensitivity to a change in interest rates. The combination of these factors allow for growth and provide additional protection during a recession and deflationary environments.
During deflationary environments, consumers defer purchases because they expect lower prices in the future. That reality convinces more people that prices are falling and induces more deferral of purchases, etc. This virulent feedback loop is difficult to change and often requires extraordinary policy measures by central banks. During the credit crisis, the Federal Reserve (FED), Bank of Japan (BOJ) and the European Central Bank (ECB) all implemented radical policy measures to fight deflation. A flight to safety…underweight stocks, overweight cash, foreign exchange (FX), insured CDs, and sovereign bonds are prudent positioning during deflation of asset values. Your cash is worth more in terms of purchasing power as time goes on so there is some inherent return to cash even if there is little or no interest income.”
Paul Bowers, Managing Director, Compass Family Offices
Invest in Commodities And Real Estate
“Typically, assets that an investor would invest during inflationary times would be hard assets such as commodities and real estate. Commodities would include energy such as oil and gas as well as industrial and precious metals (not necessarily gold), You would NOT want to invest in bonds since interest rates rise during inflation and would result in declining bond prices. Many investment advisors recommend gold but I view it as more of a crisis manager rather than an inflationary hedge. In fact, one could argue that gold might be better used as a hedge during deflationary times since deflation tends to occur in a rapidly deteriorating economy when investors flock to protect their assets.
Stocks tend not to do well in deflationary environments. One reason often provided is that revenue and earnings are under duress as prices decline, which would eventually translate into lower stock prices.”
Cliff Caplan, CFP(r), AIF(r), Neponset Valley Financial Partners
Two Sides Of The Same Coin
“Economic factors such as inflation and deflation have a direct bearing to investors’ portfolio. Both are two sides of the same coin. Inflation is the rate at which general prices for goods or services are increasing while deflation is the decline in prices.
Investors need to know how these two factors can affect their investment portfolio. In certain situations, both inflation and deflation can occur at the same time, and this poses a more difficult prospect of protecting your investment. But whether it’s deflation or inflation, there are steps you can take to avert this threat.
If it’s inflation, investors can use the stock market to protect their portfolio. Normally, rising prices are good for equities. International bonds can also provide a solution in this case. Investors can buy international bonds in countries that are not experiencing inflation and hence reduce the impact of razing inflation.
In times of deflation, the most appropriate way to deal with it is to acquire high-quality bonds rather than stocks. Bonds tend to perform well during these times. Government-issued bonds and foreign bonds provide excellent options.”
Edith Muthoni, Chief Editor, Leanbonds.com
Investments Need To Beat The Rate Of Inflation
“It’s important to consider your real rate of return when you expect inflationary markets. Your investments need to beat the rate of inflation in order to make any real progress. If inflation is 8%, you need to make at least 8% on your investments just to break even. If your investments only earn 5% during an 8% inflation period, your real rate of return is roughly -3%. You made money, but not enough to keep up.
There are ways to invest specifically in anticipation of inflation. The simplest is to invest more aggressively in stocks. Since equity investments do better over longer horizons they are often a good inflation hedge. One drawback though is you do need to plan to hold the stocks for a long time. Since stocks tend to be more volatile, you’ll need to plan for a longer investment term. In the short-term, your stock values could fall.
A direct way to invest for inflation is to purchase securities that have explicit inflation terms. The most common of these is the Treasury Inflation Protected Security, or TIPS. These are government bonds whose par value, and therefore interest you receive, adjusts with changes in the consumer price index. You can get these in terms as short as five years.
Another way to invest for inflation is to buy rental real estate. The reason rental real estate is an inflation hedge is because of the rent payments. You can adjust those for inflation when your tenant’s lease expires. If your terms on an annual basis, you would be able to make the adjustment every year.”
Brandon Renfro, Professor, Financial Planner
Regardless of the economic climate, a diversified portfolio is essential. Diversification is crucial when factoring both periods of inflation and deflation. When making investment decisions, take into account these expert tips and always do your due diligence.
The Consumer Price Index (CPI) is one of the most oft used techniques for measuring inflation the world over. Specific countries scrutinize different sets of data, but all employ a similar method. In the US, there has been contention surrounding the CPI for many years now. Initially, it was calculated by contrasting a market basket of goods from two periods – effectively operating as a cost of goods index (COGI). Yet, under the auspices of the US Congress, the CPI eventually developed into a cost of living index (COLI). In addition, as time passed methodological changes occurred which often resulted in a lower CPI. In this article, experts weigh in and provide compelling insight into whether the Consumer Price Index is a valid metric for inflation.
A Better Measure Would Be “Chained CPI”
“The Consumer Price Index (CPI) has long served as the foundational inflation measure for economic activity. In fact, it underpins the health of an economy because a stable CPI measure indicates the opportunity for economic prosperity. Absent predictable CPI readings, consumers will not have an accurate signal about price expectations and may change their behavior in detriment to the economy as a whole.
One major limitation to the current CPI measure is its inability to incorporate decisions consumers might actually make when evaluating a fixed basket of goods. For example, when a price increases for one consumer product included in the selection of goods used to measure CPI, many consumers would choose to switch to a substitute. CPI doesn’t account for this reality. Instead, CPI assumes the consumer would simply pay more for the same product. Reality usually shows a different response in the form of choosing a substitute product.
Instead, a better measure which accounts for this substitution effect would be “chained CPI.” This more closely resembles the substitution decisions consumers would make in response to rising prices of certain items as opposed to simply paying more for the same good. This metric will capture the switching dynamic.”
Riley Adams, CPA, Youngandinvested.com
Not An Exact Reflection, But Gives A Good Feel For It
“The CPI isn’t an exact reflection of the inflation rate, but it gives us a good feel for it. For the consumer, it shows them the increase in the price of the most common items that people buy, so if this is what they want to know when it is perfect.
However, for anyone interested in a deeper look at the current inflation rate there are other factors to take into account. For example, the CPI is based on a fixed basket of goods rather than taking into account every single product available. So, it really comes down to the reason for wanting to understand this subject.”
Phillip Konchar, Head Tutor, My Trading Skills
CPI Is Likely The Best Measure
“The CPI is one of a few common economic indicators that attempts to measure the magnitude of price changes (inflation) in the economy. The CPI, as the name indicates focuses on the price changes experienced by consumers. There are better indicators if one is looking at price changes for producers
(Purchaser Price Index – PPI), imports and exports (Import/Export Price Indexes – MXP), or employment costs (Employment Cost Index – ECI).
One drawback of the CPI is the time lag associated with the basket of goods included within the CPI. The basket of goods is determined by surveys the Bureau of Labor Statistics conducts to understand what products consumers are purchasing. There is generally a lag of about three years from the survey to when the basket of goods used in the Index is updated. This can be meaningful as the items consumers are purchasing can change quickly, particularly with rapid change in technology or substituting one good for another.
One other consideration is that the CPI can be volatile as it includes volatile products such as the price of energy (gasoline and natural gas prices can be quite volatile) and food. The Federal Reserve prefers to use a core inflation metric that excludes these volatile goods. The core inflation index the Federal Reserve prefers is the Personal Consumption Expenditures Price Index published by the Bureau of Economic Analysis.
Overall, the CPI is likely the best measure of the change in prices that consumers actually experience within an economy.”
John Linton, Managing Member and Portfolio Manager, Elbert Capital Management
There are both benefits and issues surrounding the use of the CPI as an accurate measure for inflation. For instance, the basket of goods used for the CPI is based upon purchases from a “typical household”, which is not a representative sample of all households. Thus, it is not an exact science, as it were. Likewise, the CPI can overstate inflation if it factors goods and services that consumers are using less of due to price increases. Substitution influences the weighting on the market basket, consequently resulting in a lower CPI. In addition, the basket of goods does not always factor the expenditure of new products that people regularly use. Consumption trends take time to be accounted for.
In essence, we are faced with a decision: accept the official CPI numbers provided by the Bureau of Labor Statistics (BLS), or choose alternate measures of inflation, thereby embracing the argument that official figures are inaccurate. Ultimately, whether or not the Consumer Price Index is a valid metric for inflation remains to be seen.
More and more investors are growing alarmed at what they see as the steady attack on the value and stability of the dollar. Between rising annual federal deficits and the over $21 trillion total U.S. federal debt time bomb, the future of the dollar and dependably low inflation is no longer a sure and certain ultimate outcome. This is why sensible investors are hedging their portfolios against both dollar devaluation and risks of significantly higher inflation. Here we look at seven solid choices to accomplish both of these goals.
Gold and Silver Bullion
It often comes as a shock to many investors to learn that studies on investments outperforming inflation show gold only outpaces the inflation genie some 54 percent of the time. This is not a fair result though. In cases where hyperinflation or substantial currency devaluation becomes the order of the day, gold (and silver too) massively outdoes inflation. In environments with high and continuous inflation, you need a prolonged depth of exposure to gold.
The surest way to reliably own gold is in the physical bullion form of it. The key is to obtain and store it in the least expensive way possible. What you need when you opt for this most secure form of gold and silver are the most broadly minted, traded, and liquid forms of bullion. This means that your top choices should nearly always be American Eagles, Canadian Maple Leafs, Vienna Philharmonics, or the British Britannia. All are popular, easy to sell in nearly all countries around the world, and come with low premiums (and discounts) over spot bullion prices.
When you are looking to make some of the smartest investments in gold, you should seriously consider a Gold IRA. It is critically important to use a reputable Gold IRA company. These three companies will steer you in the right direction and help you to pick out the best tax-advantaged gold purchases possible for your situation.
Gold and Silver ETFs
Some people are more concerned about low entry and exit fees, highest liquidity, instant saleability, and split-second diversification. In these cases, Gold and Silver ETFs may be your best option for hedging against devaluing dollars and inflation. The truth about these various ETFs is that not all of them were created equal.
The best performing ETFs are those that are most closely correlated to the underlying price of gold. The least desirable ETFs have baskets of gold miner stocks, which consistently do not closely match up in performance to the underlying price of gold (or silver). Individual gold company stocks introduce a variety of risks to the equation, such as possible corporate quarterly losses, financial bankruptcy potential, and strikes at or seizure of mines and other valuable assets around the globe. All of these risks can lead to a wide divergence between the performance of gold and the price of a Gold ETF made up of gold mining stocks.
Analysts generally recommend one of two Gold ETFs that deliver the goods. These are the SPDR Gold Trust ETF trading under the appropriate symbol of GLD and the ETF iShares Gold Trust trading as IAU. These two ETFs are not dealing in any shady derivatives or even futures contracts on the underlying metals. They actually purchase the appropriate physical quantities of their commodities to match the trading price of underlying gold (and silver) as precisely and safely as possible. Since the two funds own their physical gold outright, their performances nearly mirror gold and silver price movements. The two companies boast nearly the same risk to return profiles and ratios. Their ten year betas amount to .47 and .49 respectively.
As inflation rises and accelerates, commodities’ prices tend to rise apace. This makes them an ideal protection from the inflationary effects. There are not that many assets which gain from higher inflation, especially inflation that is unexpected. Commodities are a notable exception. As demand for services and goods rise, this typically pushes the costs of the services and goods higher, along with their underlying commodities prices for those goods utilized within them. It is the commodities futures markets that serve the role as ongoing clearing houses and auction markets for latest supply and demand information.
One thing to keep in mind with commodities is that they remain among the most volatile asset classes on the markets. They do provide higher returns in inflationary and devaluation environments, but this comes at the cost of a higher risk (in the form of standard deviation) than with standard equity investments (stocks). The key in most cases is to include commodities in an asset portfolio that is already significantly less volatile. This would decrease the all around risk to portfolio from negative correlation while often boosting the overall anticipated return.
Investing in commodities futures requires a great deal of background, some expertise, and ultimately nerves of steel. Generally only accredited or sophisticated investors meet the tests of this harder form of investing. Mutual funds provide a more suitable means of getting involved in them for the majority of investors. Alternatively, natural resources funds purchase firms that are involved with the production or mining of commodities. There are also raw commodities funds that buy into derivatives based upon commodities and back them up with fixed income investments.
The key is to be careful that you are not simply buying into mutual funds full of resource producing companies, which does not give you the real diversification you are seeking away from equities. Two solid ideas for direct commodity investments are the PIMCO Commodity Real Return Strategy Fund and the Oppenheimer Real Assets Fund that trades based upon the GSCI commodities index. There are also a range of new ETFs using the commodities indices as their underlying instruments which will be launched in the future or are imminent to be launched.
Remember that commodities have beaten inflation in an impressive 66 percent of instances. This is especially the case with the iShares S&P GSCI Commodity Index Trust.
The newest way to hedge against inflation and especially against dollar devaluation is using the cryptocurrencies like Bitcoin and Ethereum. The cryptos are a technologically cutting edged way for retaining your purchasing power. They have become particularly popular in two jurisdictions: ones with astronomical or runaway inflation like Venezuela and Argentina, and those that have capital controls like North Korea, South Africa, and China. In countries such as these with prolonged bleak outlooks, cryptocurrencies are an idea that could not come along soon enough.
This is especially the case because cryptocurrency wallets provide 24 hours per day, 7 days per week access to this electronic form of money that knows no borders. Back in Cyprus in 2013, the Cypriot Central Bank announced 100 euros per day ATM withdrawal limits. Greece went harsher with 60 euros per day in 2015. No matter how great your personal savings may have been, without access to your funds, it is irrelevant. You could lie helpless in a hospital room unable to be discharged for not paying a bill as you can not gain access to your own money.
The dawn of cryptocurrencies changed this. Citizens of crisis-stricken national economies finally found a credible and viable means of escaping from their national borders that had served as financial prisons. Farmers in Cuba may not be able to pack up and leave, nor factory workers in Iran or North Korea, but thanks to cryptocurrencies they can at least rest easy knowing that their money is continuously stored outside of the reach of their country’s central bank and regulatory agencies.
In this case, we use Real Estate to speak specifically about vehicles for holding commercial properties. This one of a kind investment class is both a hard asset that holds its intrinsic value well in inflationary and devaluation periods as well as an income-producing asset in the form of office spaces being leased out to tenants. The income-producing element pays out regularly in the form of dividends to the investors. This is why real estate has a long-term historical appeal to investors who are seeking a credible means of hedging their holdings against prolonged periods and bouts of inflation.
Real Estate equity and real estate investment trusts beat out inflation in an impressive 69 to 71 percent of real-world scenarios. Gaining a well-diversified exposure to such real estate with a reasonable expense ratio is imminently possible even for smaller retail investors, thanks to the Vanguard REIT ETF. For a comparable mortgage property residential REIT, you might opt for the Market Vectors Mortgage REIT Income ETF.
Barclays Aggregate Bond Index
Bonds may not be a vehicle that most investors think of for beating out inflation and currency devaluation, but their track record is impressive. A great barometer of this category is the bell weather Barclays Aggregate Bond Index. It beats out inflation in an impressive 75 percent of cases. You can track the index with an investment in the iShares Core U.S. Aggregate Bond ETF.
Americans have a unique Treasury option in the TIPS. These are Treasury Inflation Protected Securities. Specifically indexed to the American CPI inflation index, these Treasury instruments provide a way to protect your portfolio from inflation and its ravages. TIPS are so effective that they outperform inflation in 80 percent of scenarios. It makes the TIPS the leading out-performing category of investments.
You have three different Exchange Traded Funds to choose from to get involved in these TIPS on a highly liquid scale. Two of them track the Barclays U.S. Treasury Inflation Protected Securities Index. The third follows the iBoxx Three Year Target Duration TIPS Index.
A non-traditional investment that fares very well in periods of inflation is the category of leveraged loans. They provide low duration risk as well as a lower correlation to investment grade bonds.
There are other advantages to leveraged loans, such as comparatively attractive yields, improved diversification, lesser volatility versus equities, and the possibility of producing powerful risk-adjusted returns. Thanks to improved credit conditions, defaults should remain under average for the leveraged loan market for the foreseeable future at least.
These leveraged loans outperform inflation in an incredible 79 percent of cases. A way to invest in them with safety and liquidity is through the PowerShares Senior Loan ETF.
There is no good reason to be a prisoner of either excessive inflation or ruinous currency devaluation. Thanks to these seven credible inflation busting investments, you can both realize gains and sleep easier at night, knowing that your portfolio is effectively hedged. The additional advantage of gaining more effective and comprehensive diversification is only additional icing on your investment cake.
Inflation seemingly took a breath in March. According to Friday’s report from the Bureau of Labor Statistics, prices climbed 2.4% over the 12-months ending in March. Markets had expected an annual rate of 2.6% after February’s five-year peak at 2.7%. For the month, consumer prices inched up 0.1% in March. However, with seasonal adjustments the CPI-U posted a 0.3% decline, the largest one month drop since January 2015, when the all items index fell 0.6% with seasonal adjustments. Only two month ago, monthly inflation was at its highest level since February 2013.
Whether the decline in March represents a temporary blip on the radar or true underlying economic weakness remains to be seen. It is worth noting that when energy is excluded, the CPI-U has grown at a relatively stable rate over the past decade (represented by the blue line in the chart above). Gasoline represents roughly 3.3% of the CPI-U and half of the energy index; it has increased in price by nearly 20% over the past year, despite a 6.2% decline in March. Extreme volatility in the energy index, has been, and continues to be the dominant force impacting headline monthly inflation. Interestingly, March’s monthly decline (excluding energy) is the sharpest in the past 10 years.
March Monthly Prices
Core prices (excluding food and energy) dropped 0.1% with seasonal adjustments in March, after increasing 0.2% in February. March was the first month that seasonally adjusted core inflation dropped below zero since January 2010. Outside of the core index, food prices climbed 0.3% to more than offset a larger decline in the energy index, which fell 3.2%. Food accounts for around 14% of the all-items index, nearly twice the weight of energy.
Grocery store prices were up 0.5% in March. Prices were higher in four of the six major grocery store components; the index for other food at home slipped 0.1% and the index for dairy and related products fell 0.6%. The chart below illustrates the volatility of food prices since 2007; even with seasonal adjustments this index fluctuates drastically each month. Since 2014, the index for food at home has posted more months of declines than growth. In recent months, grocery store prices have clearly spiked.
Within the core index, shelter is by far the largest component of consumer spending. The index for shelter added 0.1% in March and 0.3% in February with seasonal adjustments. The price of medical care services was also up 0.1% in March; higher costs for hospital services (up 0.3%) were offset by lower costs for physician services (down 0.4%). The seasonally adjusted price of new vehicles fell for the second month in March, down 0.3% compared to 0.2% in February. Similarly, the index for used cars and trucks fell 0.9% in February adding to declines in both January and February.
Core prices climbed 2.0% year-over-year in March, slightly less than the all items index. Meanwhile, energy prices shot up 10.9% as energy commodities (mostly gasoline) surged 19.8% and energy services were up a more modest 3.4% annually. The food index inched up 0.5% over the 12-months ending in March. Grocery store prices fell 0.9% over the year, but this was offset by higher prices for food away from home; that index climbed an annual 2.4%.
Core commodity prices (commodities less food and energy commodities) slumped over the year ending in March, down 0.6%. This includes a 4.7% decline in the index for used cars and trucks. Apparel prices were up just 0.6% year-over-year. On the other hand, the medical care commodities index posted a 3.9% increase.
Over the year, the price of shelter rose 3.5%. Shelter is categorized as a service and service prices were up overall on an annual basis in March. The transportation and medical care service indexes were both higher, up 3.8% and 3.4% respectively. Within the transportation services index, motor vehicle insurance prices jumped 8.0% compared to a year earlier. However, declines in the price of wireless telephone services were the largest on record. That index fell 11.4% year-over-year.
The Fed has increasingly expressed their intention to continue raising interest rates, citing positive economic news and burgeoning inflation. The Fed aims to maintain an annual inflation rate close to 2% and they are generally more interested in the core index. When prices are rising faster than their target, higher interest rates prevent the economy from overheating. On the other hand, sluggish inflation is a sign of weak consumer demand and discourages current investment. Friday’s negative report may force the fed to reconsider the pace of rate hikes going forward. Inflation is not the Fed’s only mandate, they also aim to maintain stable and full employment.
According to today’s report from the Bureau of Labor Statistics, consumer prices grew a modest 0.3% in February, down considerably from 0.6% in January. On an annual basis, the all-items index (CPI-U) was up 2.7% in February and 2.5% in January. These are the highest annual rates in nearly five years (see graph below). Excluding food and energy, consumer prices were up 0.4% in February and 2.2% over the 12-months ending in February. These were the numbers analysts had expected.
Year-over-year, the price of food was flat in February despite plenty of volatility in grocery store prices. The price of meat declined significantly, including uncooked ground beef, down 6% and ham, down 3.9%. The price of eggs reportedly dropped 23.6% over the same 12-month period. The index for fresh vegetables fell 7.2% and fruit prices were down 4.3%. These declines were somewhat offset by higher prices for fish and seafood, up 3.4% for the year. Overall, the grocery store index fell 1.7% on an annual basis, while the index for food away from home added 2.4%.
For the year ending in February, the energy index advanced 15.2%. The soaring price of energy commodities was tempered by more modest growth in the price of energy services. Energy commodities, which account for roughly half of the energy index, were 29.8% more expensive in February compared to a year earlier. This is largely the result of higher prices at the pump; the gasoline index grew 30.7% year-over-year. Over the same period, the index for energy services (which includes electricity and utility piped gas) was up 3.5%.
There was a downward trend in the price of many retail commodities over the relevant year. The index for household furnishing and supplies fell 1.7%, while the apparel index inched up just 0.4% and prices for recreational commodities dropped 3.3%. Transportation commodities, which do not include motor fuel, posted a 1.2% annual decline in prices. While the price of new vehicles was up 0.5%, the index for used vehicles dropped 4.3%.
The index for transportation services grew 3.6% annually despite declines in the cost of car and truck rentals, reportedly down 1.7%. Over the same period, the index for motor vehicle maintence and repairs added 2.5%. The major reason for higher transportation service costs was a 7.6% spike in motor vehicle insurance rates. Intercity train fairs also jumped a notable 5.4%.
The price of medical care commodities appreciated significantly over the year. That index was up 4.1%, mostly the result of a 5.2% annual increase in prices for prescription drugs. Similarly, medical care services recorded a 3.4% year-over-year increase. The price for physician services was 3.6% higher compared to a year earlier while the index for hospital services was up 4.3%.
Shelter is the largest component of the all-items index, accounting for over a third of its total. The shelter index, up 3.5% over the year ending in February, is mostly comprised of rental costs including owners equivalent of rent, which is a reflection of home values. The index measuring owners equivalent of rent climbed 3.5% while those renting their primary residence saw costs rise 3.9%.
Inflation in February
In February, the price of food gained 0.2% with both the index for food at home and food away from home rising at that same rate. Three of the six components of grocery store consumption increased by 0.2% over the month; cereals and bakery products, meats poultry fish and eggs and fruits and vegetables.
The energy index declined on a monthly basis, down 0.7% in February. Although energy service prices added 0.5%, a 2.0% decline in the the energy commodity index more than offset the rise. Volitile gas prices were once again responsible for changes in the energy index. Prices at the pump dropped 2.1% in February. Gasoline accounts for roughly 3.4% of the all-items index and nearly half the energy index. The graph below illustrates the average price of regular unleaded gasoline per gallon over the past decade.
The apparel index, which includes clothing, footwear and accessories, jumped 2.4% in February. However, with seasonal adjustments, the apparel index was up 0.6%, following a 1.4% seasonally adjusted increase in February. The index for transportation commodities increased 0.2% in February, including 0.4% growth in the price of used vehicles. The transportation services index added a more significant 0.8% in February. The price to lease a car or truck was 2.0% higher for the month and the index measuring the cost of public transportation increased by 2.3%. Medical care was more expensive in February. Medical care commodity prices grew 0.5% as prescription drug costs were 0.6% higher. The medical care service index was also up 0.6% as the price of hospital outpatient services shot up 1.3% in February.
Inflation appears to have rebounded despite February’s low monthly rate. The CPI-U has surpassed the Fed’s annual 2% target after remainingy stubbornly low throughout 2015 and most of 2016. Along with higher inflation, employment and economic growth numbers support today’s decision by the Federal Reserve to raise interest rates. The optimism reflected in the stock market also indicates the economy may need to be reigned in. Today, interest rates were increased by 0.25% to a range of 0.75% to 1.0%. Higher rates make borrowing harder for business and consumers but also keep prices from growing to quickly, which is good for the consumer. The Fed did not alter their outlook for 2017, two more rate hikes are expected this year.
Consumers paid more for almost everything in January compared to a month earlier. Headline inflation hit 0.6% for the month after posting a decline in November and no change in December. Inflation in January was well above 2016’s average monthly rate of 1.5%. Year-over-year, consumer prices were up 2.5% in January, slightly more than analysts expected and the highest annual rate since March 2012.
Today’s report from the Bureau of Labor Statics supports the Fed’s case for raising interest rates. However, the CPI-U is not the their preferred measure of inflation. They focus more on the personal consumption expenditure index (PCE), which remains below the 2% target. January’s strong consumer price report coincides with positive retail and employment data – more indications that it’s time to move towards less accommodative monetary policy.
Prices in January
The food index added 0.4% in January as both the index for food at home and the index for food away from home climbed 0.4%. Grocery store prices increased across the board; the index for dairy and related products was up the most, climbing 0.9% and the index for cereals and bakery products ticked up 0.6% month-over-month. Fruits and Vegetables was the only component of grocery store spending to decline, down a monthly 0.1% which becomes a much larger decline of 1.7% after seasonal adjustments. The seasonally adjusted food index inched up 0.1% after remaining flat for most of 2016. Similarly, seasonally adjusted grocery store prices were flat in January, ending a series of declines.
The energy index climbed 3.3% in January, which is a seasonally adjusted 4.0%. Within the the sector, the price of gasoline drove much of the month-over-month growth. Gas prices were reportedly up 5.3% or a seasonally adjusted 7.8%.
Core inflation, which excludes food and energy, was up 0.4% in January. With seasonal adjustments, core inflation was 0.3%. Within the core index, the price of new vehicles increased 1.1%, while prices for used cars and trucks fell 0.1%. Used cars and trucks was the only major expenditure category in the core CPI–U to decline over the month. Core commodity prices were up 0.5% and core services were up 0.3%. The service indexes for both medical care and transportation added 0.4%. Also notable, Airline fares spiked 1.4% in January.
The shelter index, which accounts for roughly one third of the all-items indexed, was 0.3% higher in January. With seasonal adjustments, growth in the price of shelter slowed in January, to 0.2% from 0.3% in both November and December.
Although energy prices surged over the year ending January, core inflation was also strong, up 2.3% year-over-year. Stagnating food prices countered the impact of higher energy costs within the all-items index. Food prices fell an annual 0.2% in January while the price of gasoline pushed 20.3% higher. The graph below shows the 12-month change in the food and beverage index falling throughout 2015 and 2016. Overall grocery store prices were down 1.9% for the year ending January and the cost of food away from home reportedly climbed 2.4%.
The jump in the energy index was caused by higher gas and fuel oil prices. Energy commodities represent roughly half of the energy index, which is close to 7% of the all-items indexed. A 20% spike in the energy commodity index contributed nearly 0.7% to overall inflation for the year. Energy services, on the other hand only added 2.9% over the 12-month ending in January.
Within the core index commodity prices slid 0.2% over the year, largely the result of a 3.7% decline in the price of used cars and trucks. In general, commodity prices were up for the year, with medical Medicare commodities rising the most, up 4.7% annually.
Shelter prices were significantly higher year-over-year; that index was up 3.5%, including 3.9% growth in the index for rent. Medical care and transportation services were also more expensive, up 3.6% and 3.2% respectively. Despite spiking in January, Airline fares fell 3.3% for the year.
Addressing congress this week, Chairman of the Federal Reserve, Janet Yellen spoke of the possibility of rate hikes as soon as next month. She also warned of the dangers of waiting too long to raise rates and potential damage if it became necessary to raise rates quickly. Yellen also stressed the importance of sticking to the Fed’s dual mandate – stable inflation and full employment. While generally positive in her outlook for the US economy, Yellen noted the high level of uncertainty that exists in today’s political environment. Earlier this month the FOMC opted to ‘maintain the target range for the federal funds rate at 0.5% to 0.75% percent [and keep] the stance of monetary policy accommodative.’
Inflation climbed above the Fed’s 2.0% target rate to round out 2016 with the highest year-over-year rate since June 2014. December’s inflation report from the Bureau of Labor Statistics did not surprise markets, that expected the data to reflect growing strength in the economy. Headline inflation, as measured by the consumer price index for all urban consumers (CPI-U), was up 2.1% year-over-year in December, the highest annual (December to December) rate in five years and significantly above the 10-year average of 1.8%.
Annual inflation spiked from 1.7% in November and has been accelerating since July. The all items index also continued to move closer to the core index as food and energy prices move in opposite directions. The core index (all items less food and energy), which is designed to be less volatile, was up 2.2% in December.
The CPI-U was unchanged on a monthly basis in December, after dropping 0.2% in November. However, with seasonal adjustments, consumer prices were up for the fifth consecutive month, adding 0.3% in December and 0.2% in November. Core inflation was up a seasonally adjusted 0.2% in December.
December Inflation Breakdown
Seasonally adjusted food prices were flat in December. Prices at the grocery store fell 0.2% while the cost of food away from home increased 0.2%. The index for meats, poultry, fish and eggs declined by 0.8%, while dairy and related products posted a 0.5% price increase for the month. On a seasonally adjusted basis, the food index has been flat since July and the index for food at home has declined for 8 consecutive months. The chart below shows the seasonally adjusted rates of inflation within the food index for December.
Energy prices were up a seasonally adjusted 1.5% in December, largely because of a 3.0% spike in prices at the pump, measured by the gasoline index. The price of fuel oil also jumped 0.6%. Excluding food and energy, the all items index was up a monthly 0.2% to match the rate in November. Within this core index, the price of used cars and trucks added 0.5% and the index for transportation services grew by 0.6%. The price of shelter continued its steady climb, adding 0.3% month-over-month. Medical care prices also inched up with medical care service costs increasing 0.1% and medical care commodity prices up 0.4%. Balancing some of this growth, the price of apparel reportedly dropped 0.7% in December following a 0.5% decline in November.
Over the year, the price of food slipped 0.2% as prices at the grocery store continued t0 decline. The index measuring the price of food at home fell 2.0% in 2016 with prices at the grocery store were down in all six major categories. The index for fruits and vegetables declined 2.4% year-over-year in December. At the same time, the index for meat, poultry fish and eggs dropped 5.4% and dairy prices were down 1.3%. The index for food away from home moved in the opposite direction, up 2.3% year-over-year. The net result was a marginal decline in the food index as food at home accounts for a larger share of the food index compared to food away from home.
After falling in 2014 and 2015, the energy index spiked 5.4% in 2016 including a 9.1% increase in prices at the pump. The price of fuel oil increased 12.7% in 2016. Electricity bills posted a 0.7% increase over the relevent year, while piped gas utility service costs were up 7.8%.
Excluding food and energy, core inflation was a healthy 2.2% in 2016, marginally higher than 2015’s core rate of 2.1%. Core inflation was led by growing shelter prices, up 3.6% year-over-year as rent prices climbed 4.0%. Medical costs also contributed to higher overall prices for the year, up 4.1%, largely the result of a 6.2% jump in prescription drug costs.
December’s inflation report potentially points to the end of a long period of slow inflation and hesitation about raising interest rates. Although there is an unprecedented amount of uncertainty in the markets, the economy appears to be strengthening. Inflation has been the missing piece in the Fed’s criteria to raise rates, which have remained stubbornly low for roughly four years.
After raising the benchmark overnight interest rate by 0.25% to a range of 0.50% to 0.75% in November, the Federal reserve expects they will need three rate hikes in 2017 to keep the economy from overheating. If inflation continues to accelerate, the fed will likely be raising rates more than anticipated this year.
This morning the Bureau of Labor Statistics released consumer price data for November that was marginally ahead of expectations. For the year, prices measured by the Consumer Price Index for All Urban Consumers (CPI-U) climbed 1.7%, compared to an anticipated 1.6%. This is good news for the US economy as inflation has remained stubbornly low while jobs and other economic indicators have been more positive. Today’s report comes in the shadow of yesterday’s much anticipated FOMC decision to tighten monetary policy by raising rates by 0.25%.
The 0.2% decline in prices in November reflects a seasonal phenomena, which when corrected for, yields a 0.2% increase in the all items index. In October, seasonally adjusted prices climbed 0.4%. Core inflation, which excludes food and energy, was flat in November but after seasonal adjustments, rose 0.2%, compared to 0.1% in October. Over the relevant year, the core index climbed a healthy 2.1%.
The 0.2% seasonally adjusted increase in the all items index in November can be largely attributed to a 1.2% jump in the energy index. The price of gas rose 2.7% in November on a seasonally adjusted basis. Prior to adjustments, prices were down 2.4% at the pump. Energy service prices fell 1% year-over-year, while energy commodity prices were 2.5% higher.
Food prices (seasonally adjusted) were flat for the month including a 0.1% dip in prices at the grocery store, adding to a streak of declines over the previous six months. The cost of meat declined 0.1% in November, following a 0.7% decline in October. Also significant, a 1.1% decline in the price of milk in November after falling a 0.9% in October. The price of fruits and vegetables slipped 0.2% in November canceling out an equal gain in October. Meanwhile, the index for food away from home inched up 0.1% in November.
Shelter, which accounts for 33.5% of the all items indexed, was 0.4% more expensive in November as rent prices grew 0.3% and the index for owners equivalent of rent was up 0.4%. Medical care commodities added 0.6% on a seasonally adjusted basis in November and the price of medical care services reportedly added 0.3 to match October’s growth. The index for airline fares slid a notable 1.3% in November after also diving 2.2% in October.
The core index, up 2.1% for the year ending in November was greatly impacted by increasing rental prices. The shelter index posted 3.6% annual growth, with the subindex for rent of primary residence growing 3.9% year-over-year (the shelter index accounts for over 42% of the core index). Medical care costs also climbed through the year as the index for medical care commodities added 4.3% and the indexed for medical care services was up 3.9%. The most significant change was in the price of hospital services, up 4.3% annually.
The transportation services index reportedly added 2.5% for the year. Within this index, motor vehicle insurance prices were 6.7% higher while Airline fares declined 6.6%.
Weighting on annual inflation numbers, the price of food fell 0.4% over the relevant year. At the grocery store prices were down 2.2% and lower in every component of grocery store spending. The most significant decline was posted by the index for meat, poultry, fish and eggs, down an annual 6% in November.
The energy index increased 1.1% over the 12-months ending in November, including higher costs for both energy commodities and energy services, up 0.8% and 1.5% respectively. At the pump, consumers paid 1% more for gas in November compared to November of 2015.
Monthly inflation was strongest in the Northeast where prices remained flat prior to seasonal adjustments compared to a 0.2% decline for the country as a whole. Prices were most sluggish in the Midwest, down 0.3% for the month. Also, inflation was most robust in larger cities, those with populations over 1.5 million posted a net monthly decline of only 0.1%.
On an annual basis, inflation was also highest in bigger cities. In Western urban areas the all items index climbed 2.3% compared to a national average of 1.7%. Prices growth was slower in the Midwest and the South, up only 1.2% and 1.6% annually.
On Wednesday, the Federal Reserve upped its benchmark interest rate by 0.25% to 0.5%-0.75%, recognizing the “considerable progress” the economy has made in terms of job growth and price stability. The Fed voted unanimously to raise rates, marking the second hike since the financial crisis of 2008.
Expectations are for continued economic growth and for inflation rise t0 2% over the next couple of years – which is their target rate. Although, the cloud of uncertainty that surrounds the political environment and the potential for large policy shifts in the near future make the path of interest rates and the direction of the economy highly unpredictable. As of Wednesday, the fed anticipates three rate hikes in 2017.
Prices, measured by the consumer price index for all urban consumers (CPI-U), inched up 0.1% in October, after increasing 0.2% in September. However with seasonal adjustments, inflation accelerated to 0.4% in October from 0.3% in September due to a spike in energy prices. On an annual basis, the headline index climbed 1.6% in October, the highest annual rate in 2 years.
October’s CPI report, which the BLS released this morning, suggests that underlying economic strength has yet to put much pressure on consumer prices. Core inflation, up a seasonally adjusted 0.1% in October, was below analysts’ expectations. Year-over-year, core inflation has declined for the second consecutive month.
Today’s report is important as retail sales surpassed expectations this week and point to economic stabilization. Employment numbers are also strong, which makes the case for the Fed to begin tightening or raising rates to reign in accelerating economic growth. Inflation has been the missing piece in the Fed’s criteria for a rate hike and that has not changed today. However, October’s inflation numbers will likely not spook investors expecting to see interest rates moving higher.
The energy index fell 0.5% in October prior to seasonal adjustments. Prices at the pump were 1.8% higher and fuel oil costs increased 5.9%. Offsetting this growth, the index for energy services declined significantly, down 2.8% due to a 3.7% drop in electricity service costs. With seasonal adjustments, gas prices were 7% higher in October and the energy index actually climbed 3.5% in October. Seasonally adjusted monthly inflation appears to be accelerating.
The price of food was up 0.1% in October but flat with seasonal adjustments. There was no change in the index for food at home. At the grocery store, a 0.8% decline in the index for meats, poultry, fish and eggs was balanced by higher prices for most other food items. The index for food away from home increased 0.1% in October.
The index for all items less food and energy gained 0.2 % in October. Within this core index, the index for shelter increased 0.3%, with rent prices up a monthly 0.5%. The medical services index was flat. The index for transportation services increased by 0.5%, including airfares climbing 1.3% and car insurance up 0.9% in October.
The CPI-U was up 1.6% year-over-year in October despite a 0.4% decline in the food index. To reflect consumer spending habits, food accounts for roughly 14% of the CPI-U. About 8% is allocated to food at home and the remainder measures the price of food away from home. Over the past year, the index for food at home has declined 2.3% and the index for food away from home has increased 2.4%. All six components of grocery store consumption posted lower prices year-over-year; the largest decline was in the price of meat, poultry, fish and eggs, down an annual 6.4%.
The energy index increased a modest 0.1% over the relevant year. Energy commodity prices fell 0.9%, including a 0.9% decline in gas prices. Energy service prices were up 1.3%. Commodities and services each account for roughly half of the energy index.
The index for all items less food and energy added 2.1% over the year ending in October. Shelter costs were reportedly up 3.5% with renters paying 3.8% more than a year earlier. The cost of medical care services also grew, up 4.1% as health insurance was 6.9% more expensive over the year ending in October. Prices for medical care commodities jumped 5%, driven by a 7% increase in the cost of prescription drugs.
The price of used cars and trucks declined 4.1% over the relevant year but the index for car and truck rentals grew 4%. Also notable, the cost of car insurance was 6.7% higher.
The FOMC met to discuss monetary policy on November 1-2 and decided to leave the overnight rate unchanged. Accomodative monetary policy was again deemed necessary to support improvements in the labor market and a return to the 2% inflation target. However, it is largely agreed at this point that the time to raise rates has come. Yellen has strongly indicated that this will happen in December. The pace of future rate hikes is less agreed upon.
“Inflation is expected to rise to 2% over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. Near-term risks to the economic outlook appear roughly balanced.”
Following some initial turmoil in the post-election markets, during which expectations for a rate hike in December temporarly dropped, markets have changed their tune. Inflation expectations have recently moved much higher as investors are betting on increased government spending to spur growth and drive future inflation. Markets have priced in a near 100% likelihood of a rate hike in December.