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Forget Waldo...
Where's Inflation?

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The Federal Reserve has told us many times that the low level of inflation is transitory, and inflation will eventually manifest. But so far, there has been no sign of sustained price pressure. Both the PPI and CPI gauges of inflation came in below expectations and at or below prior readings. The core year-over-year measures remain well below the Fed’s target of two percent. Core Y/Y PPI fell to 1.8 percent, and the same CPI measure stayed at 1.7 percent for the third month in a row, the lowest rate since May 2015. In fact, this measure has been sliding since reaching a recent peak rate of 2.3 percent in January. Significant price declines came from auto sales, hotels and motels, and gasoline prices. Prices continue to increase for medical care and rent. How long can we keep blaming low inflation on energy alone?

Other Key Indicators this Week:
 

JOLTS – As job gains continue to increase, so does the number of job openings. The Labor Department reported the largest increase of job openings in June in almost two years. The number of available jobs rose by 461,000 to 6.2 million. Construction and transportation services posted the largest increase in job openings, followed by healthcare and professional services. The rate of hiring held steady at 3.7 percent, while the rate of separation – whether voluntary or involuntary – remained at 3.6 percent. Employers are more willing to keep current staff, as finding qualified people to fill jobs becomes increasingly more difficult.

Consumer Credit – U.S. outstanding consumer debt increased 3.9 percent in June, a gain of $12.4 billion. The smaller-than-expected increase balanced out the previous monthly increase of $18.3 billion, which was the largest rise since November 2016. Non-revolving debt, comprised mostly of auto and student loans, increased 3.5 percent, the slowest pace in a year. June is not typically a strong month for student loans due to tuition schedules, and auto sales continue to shrink. All loans made by credit unions increased 0.7 percent in June and 4.5 percent in the second quarter.

Productivity – The pace of worker productivity improved in the second quarter, but not enough to satisfy economists. Productivity increased 0.9 percent. While an increase, the overall level remains sluggish by historical standards. The average level of productivity between 2007 and 2016 was 1.2 percent. Continued weak productivity levels will constrain economic growth, making it difficult to exceed the current two percent rate. To put it in perspective, according to Federal Reserve Vice Chairman Stanley Fischer, "If labor productivity grows an average of one percent a year,…living standards will take two generations to double."

Between the Numbers:

Despite a roaring labor market, the credit cycle is turning. After peaking at 4.85 percent in Q2 2009, consumer loan delinquency rates steadily declined and remained at two percent from Q1 2015 through Q1 2016. Since then, they have steadily risen and are now at 2.2 percent. The story is much the same for credit card delinquencies and auto loans. While rates are still low, what’s concerning is the rise in delinquencies amid low unemployment and rising wages.

Sarina Freedland – Senior Investment Officer

Although this information has been obtained from sources we believe to be reliable, we do not guarantee its accuracy, and it may be incomplete or condensed. This is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. All herein listed securities are subject to availability and change in price. Past performance is not indicative of future results. Changes in any assumption may have a material effect on projected results.