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Inflation Not a Threat Yet

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The markets and investors have been over-worried and over-focused on rising inflation ever since the January job report was released in February. Initial reports of a 2.9 percent annual gain in wages created a wave of panic. Since then, several reports have been released that have calmed the market into realizing inflation is not the raging storm to be feared. This week's key inflation reports gave evidence the pace of inflation slowed in February, as both consumer and wholesale prices increased 0.2 percent, much lower than prior readings. Year-over-year rates were marginally higher, but not enough to cause concern. Prices for fuel, autos and rent declined, while apparel costs rose for the second month. The PPI report reflected an increase in services, while the cost of goods declined for the first time in nine months. And don't forget, the year-over-year increase in wages that kicked off the inflation storm has been reduced to a more moderate increase of 2.6 percent. For now, the rise in inflation is maintaining a level even Goldilocks would favor.

Other Key Indicators this Week:

Retail Sales – Consumers took another month off from their favorite pastime of spending. Retail sales fell 0.1 percent in February, the third decline in as many months. The decline spooked the stock market into a one percent decline immediately following the report on fears that consumer demand was waning and never coming back. Seven of the 13 major industries reported declines. Sales were most notably lower at auto dealers and gas stations, but surged 1.9 percent at building material stores. Analysts remind us that after a robust holiday shopping season, it is understandable for sales to slip early in the year.

Manufacturing – The manufacturing component of industrial production increased 1.2 percent, the fastest pace since October 2017. Production at auto plants increased an impressive 3.9 percent. Capacity utilization, a measure of productivity at a plant, grew to 78.1 percent, the highest level in over three years.

Housing – As you should not judge a book by its cover, so it is with some economic reports. The headline for February housing starts revealed a startling 7.0 percent drop in activity. But details within the report paint a less gloomy picture. The decline was caused by a 26.1 percent decline in multi-family housing after a rise of almost the same amount in January. The good news is that construction on single-family housing increased for the second consecutive month, up 2.9 percent.

Strategically for Credit Unions:

Get ready. The FOMC meets next week. It is fully expected the committee will vote to increase the fed funds rate by 25 basis points. This will bring the rate range to 1.50 to 1.75 percent. The short end of the curve has already built in the rate move with the two-year Treasury yield 40 basis points higher since the end of 2017. The yield is 78 basis points higher than the high end of the fed funds range.

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.