See this week's numbersFriday, October 21, 2016

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Do we have a consensus on inflation?

Two indices that have not always moved in the same direction aligned in September, which should bring smiles to the faces of all the Federal Reserve decision-makers. The consumer price index (CPI) rose 0.3 percent in September, matching the increase in last week’s wholesale price index. The change in CPI was the largest increase in five months. And, as in the PPI report, most of the gain was attributed to an increase in gasoline prices. More than half of the CPI rise was due to a 5.8 percent jump in the gasoline price index. The core index, all prices minus food and energy, was up just 0.1 percent, half the rate from the prior month. Shelter and medical costs continue to be the main contributors to the core rate of inflation. Year-over-year core inflation was up 2.2 percent, a decline from the recent high level of 2.3 percent. Just as the decline in the price of oil has dampened inflation for the past year, the gradual price increase occurring now is shifting the inflation indices in the direction awaited by the Federal Reserve.

Other Key Indicators this Week:

Housing – Construction on new homes in September plummeted to the lowest level since March 2015. Housing starts fell 9.0 percent to a 1.05 million annualized rate, up 3.7 percent from a year ago. Three of the four regions posted a decline in activity, with the West experiencing no change from the prior month. The silver lining in the report was an increase in single-family housing construction of 8.1 percent to 783,000, the strongest pace since February. Multi-family construction, which has been the leading force in the housing industry in recent years, declined 38 percent. Building permits, a forecast of future activity, rose 6.3 percent.

Existing home sales rebounded in September, increasing 3.2 percent. This brings the annual sales rate of 5.47 million to the highest rate since June. First-time homebuyers accounted for 34 percent of the activity, the highest share in over four years. The median sales price rose 5.6 percent. A shift is beginning from multi-family home sales (down 3.2 percent) to single-family home sales (up 4.1 percent). Sales were higher across the country.

The Beige Book – The 12 Federal Reserve districts reported a “modest or moderate pace of expansion” between late August and early October, according to the latest Beige Book report, an economic survey by the Federal Reserve banks. The labor market remains tight in most areas of the country, with wage pressures only beginning to surface. Philadelphia noted wage pressure for some skilled jobs, while the St. Louis and San Francisco districts cited pressure for entry-level positions. The housing sector is expanding in most districts, despite lower-than-normal home sales. Three districts – Dallas, Richmond and San Francisco – are experiencing a shortage of construction workers, which is constraining building activity. The oil and gas sector is beginning to show signs of stability.

Strategically for Credit Unions:

With just over a week until the November FOMC meeting, the markets continue to place higher bets on a December rate move over November. While the Federal Reserve insists there is no political influence in their decision-making, the likelihood for a change just a week before the Presidential elections seems unlikely. Regardless of when the Fed makes their next move, market interest rates will follow slowly. The uncertainty around global economic strength will continue to keep pressure on sovereign debt, holding down government yields, despite the rate moves from the Federal Reserve.

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.

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