Is inflation finally headed higher?
Core Personal Consumption Inflation. Source: Bureau of Economic Analysis
It sure doesn’t look that way. The broadest measure of consumer prices, the deflator for personal consumption expenditures, was flat November. That’s because incomes were flat, and consumption was flat. Most economists believe that a reacceleration in consumption will be the overarching economic theme for 2017. But this isn’t set in stone. If employment growth slows and wages stall, then we’ll still be stuck in the rut we’ve been in for a while.
Over the past 12 months core inflation has growth about 1.7%–up slightly from a year ago, when prices were growing only 1.4% per year. There’s a slight upward trend, but only very slight. And the latest dip in the rate will put downward pressure on the trend. This is a far cry from the fears of accelerating inflation that accompanied the Fed’s unconventional policy initiatives five or so years ago.
Inflation is important. If prices rise too fast, purchasing power erodes and people can’t make ends meet. In the ‘70s and ‘80s, when prices were spiraling out of control, it was hard for businesses to plan for the future, and investment spending a productivity lagged. But if prices decline – deflation – firms have difficulty financing their debt. Business leaders become cautious about expanding, because the price of what they sell may fall. That’s why many folks think productivity is lagging today.
Source: Bureau of Labor Statistics, Bloomberg
The post-election rally has been based on the expectation that tax reform and regulatory relief could boost the economy and get us out of the slow-growth low-inflation rut we’ve been in for the past six years – ever since the Financial Crisis and Great Recession. But we’ve been in a disinflationary trend for the past 30 years. If inflation stays low or moves even lower, we may not see the faster growth everyone is hoping for.
Douglas R. Tengdin, CFA
Chief Investment Officer