Consumer inflation, according to the Federal Reserve’s inflation gauge, just hit a 50-year low according to the Personal Consumption Expenditures (PCE) price index, which is maintained by the Bureau of Economic Analysis.1
Besides tracking consumer inflation, the PCE price index measures data like household purchases, a major factor in GDP growth. The core PCE index does the same thing without including volatile food and energy prices. The broad PCE index hit 0.74 percent in May, with core PCE at 1.05 percent — a new all-time low, breaking the 1.06 percent measured in March 1963.
Certainly the Federal Reserve is doing its part to stir up inflation by “printing money” to the tune of some $85 billion a month, all the while the headline PCE index has fallen even more since last year (it approached 2.0 percent in early 2012). The Consumer Price Index only advanced 1.1 percent between May 2012 and May 2013, and that was the smallest annualized gain in the CPI since November 2010; the core CPI only rose 1.7 percent in that period.1,3,
So, what is keeping inflation so low? The best prognosticators say chalk it up to extraordinary circumstances –and the betting money is that these low rates will continue. Short-term interest rates are nil and the Federal Reserve has told the world that our benchmark interest rate will be at rock-bottom levels until our jobless rate dips below 6.5 percent or inflation tops 2.5 percent. To this I say, don’t hold your breath.
Alongside the issues of inflation we also face the prospects of disinflation. And, there are a couple of economic factors at work that are stoking the flames here, as well: One, the Fed has communicated that it will not let inflation get out of hand or exceed its present 2.0 percent target. Two, economists, analysts and investors seem to have widespread faith that the Fed can capably fight sudden spikes in the PCE index or the CPI and keep things under control. Three, total government spending (as a percentage of potential nominal gross domestic product) fell about 3 percent from 2010 to 2012 – and that’s not even taking issues of our recent sequestration into account. According to economic experts, these kinds of indicators imply a reduced demand in the economy.
Psychologically, there is little or no fear of runaway inflation and the prevalent expectation is that there will be low inflation for some time. This psychology may be influencing the current disinflation as well.
Also, while the Fed prints more and more money and purchases bonds from banks via its ongoing stimulus, with the bulk of that money sitting in bank reserves. All the while, bank lenders are content sitting on these reserves as they pay interest. Should the Fed boost the interest it pays on them, many think it simply gives these banks more reason to maintain them.
When might inflation expectations change? Truth be known, no one is sure. But it’s a safe bet that they can’t go much lower. Then again, if the Fed were to raise its inflation target, they would change greatly. However, no one seems to want to show their hand as to when that may soon happen. For us here in Greenville, the main area we feel the effect of inflation are at the gasoline pump. With less being spent at the pump as well as with utility bills, we all experience the good feeling that more money stays in our pockets.
This month’s Parting Shot: A recent article in the media indicated that Mississippi’s tax revenues are approaching the $5 billion mark for the first time. One interesting statistic buried in this article quoted Sen. Buck Clark as saying that while the state had experienced increasing revenues, it has also “burned through the savings account from tobacco lawsuit settlements during the recession that has been used over the last several sessions in propping up year-to-year spending.” What this means is we no longer have that cushion in case of another downturn. The money comes, the money goes . . .
Ike S. Trotter, CLU, ChFC, is a financial advisor in Greenville. Securities and investment advisory services provided through Woodbury Financial Services Inc., Member: FINRA, SIPC and Registered Investment Advisor, P.O. Box 64284, St. Paul, MN 55164. Tel: 800.800-2638. IKE TROTTER AGENCY, LLC, and Woodbury Financial Services are not affiliated entities. Information and opinions expressed are those of the author and not necessarily those of Woodbury Financial Services Inc.