Reason for Pause | July 12, 2019

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AUTHOR:  Jason J Roque, CFP®, APMA®

TITLE:  Investment Adviser Rep—CCO


The economy has been void of inflation for quite some time now.  Last week, inflation data may have given us reason for pause.


Inflation data, as measured by the Consumer Price Index (CPI) came in at 1.6%[1] well under the Federal Reserve Board’s (FRB) 2% target. Upon closer examination, core CPI, which strips out food and fuel and can be volatile, came in at 2.1%.  This is not the first time it has crested 2% in this expansion cycle, but the tone is certainly different this time.


During times when inflation is weak and needs to be stimulated, the FRB will cut rates, stimulate the consumer, and drive up inflation; during times of strong inflation, however, the FRB is likely to increase interest rates.  This keeps consumers on the sideline and keeps inflation from running out of control.


Inflation, typically, is born out of consumer spending–enough to bring utilization to a historical high (the capacity at which corporations can produce goods).  This results in companies being forced to raise prices to satiate the continued demand.  This go around, increases in inflation are actually tying back to tariffs.  There is a correlation between the regions seeing above average inflation and those being tariffed.  Corporations were willing to absorb 10% tariffs, but 25% appears to have been enough to push through to consumers.


So, with inflation rising and the FRB usually raising rates in this scenario, why is a rate cut expected?  Trade… with the majority of inflation looking like it came from tariffed goods, a shift in trade progress could change inflation.  The FRB has to move based on inflation coming from external factors and that could cause consumers to pause.  If that were the case, a recession would be eminent.  Their goal is to keep the expansion going which, in turn, keeps people employed (the FRB’s other mandate).


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Always remember that while this is a week in review, this does not trigger or relate to trading activity on your account with Financial Future Services. Broad diversification across several asset classes with a long-term holding strategy is the best strategy in any market environment.

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[1] www.investing.com/economic-calendar