 | AUTHOR: Jason J. Roque, CFP®, APMA® TITLE: Investment Adviser Rep – CCO TAGS: Inflation |
Not generally an exciting topic, but still important is the role of inflation and if it has been sidelined?
Background
The Federal Reserve Board (FRB) maintains a goal of 2% inflation. As of late this mandate has been interpreted to mean a symmetrical relationship with 2%. For much of the last decade inflation has been under 2%. ‘Symmetrical’ means the FRB is comfortable with it exceeding 2% to the same extent that it under shot it.
Are you asleep yet? Maybe this will help… There are two common measures of inflation, Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE). How about now, still reading? CPI is running at 2.3% as of December, which is firm indication of inflation. To the contrary PCE, the FRB’s preferred measure is running at 1.5% as of January. This lack of inflationary pressure is why the FRB is currently projecting no rate increases for 2020.
Corporate America
Corporate earnings should show strength this year following an average of -2.5% for the first three quarters of 2019. If corporate earning improve, capital expenditures (CAPEX) should also improve. This increase in CAPEX should reaccelerate the economic landscape in the US.
Jobs
Unemployment continues to show strength. Wages retreated a bit this last month but should be temporal. Payroll spends from corporate America should improve in the future, a reflection of additional corporate spending. As wages grow, so does disposable income. As disposable income gets put to use in the economy, we should see a tick up in capacity utilization. Capacity utilization should lead to prices firming… and boom… inflation.
Conclusion
As CAPEX improves, production increases, wages grow, and the FRB stays pat, we should see inflationary pressures increase. Here is the catch… If inflationary pressures do increase, do not expect to see the FRB stay on the sidelines. The FRB would come off the sideline and start playing a role to decrease inflationary risks. With rising rates to combat inflation, market volatility will go up.
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