Price inflation temporarily cools

by: , Managing Director, Economist, and Portfolio Manager, New York Life Investment Management

The consumer price index rose an expected 0.2% (excluding food and energy) in the month of October with year-over-year growth moving lower. Worries about a sustained acceleration of inflation continue to be pushed back.

Core CPI Inflation

Source: Thomson Reuters DataStream, Bureau of Labor Statistics (BLS), NYLI SAS. As of 11/14/18.

To the extent that core inflation may be settling in the 2% range rather than accelerating to a faster rate should be good news for investors. It reinforces the notion of a gradual, but mild, pick up in underlying inflation. This may force the Fed to consider curbing its rate hike trajectory. Lower inflation also amplifies real household income and real corporate earnings.

Core inflation is stabilizing at a level the Fed, the economy, and markets should be comfortable with, however, the effect of Tariffs hasn’t fully materialized as a major inflation threat. Admittedly, more tariffs may be in store that could put upward pressure on agriculture and industrial manufacturing. Still, 70% of the core index is services. The primary driver of service costs is the housing market. Housing currently shows some sustained upward pressure, but even there, inflation looks stable.

To the extent the housing market is taking a bit of a breather, there may be even less upward pressure on inflation than we previously assumed. The fact that it’s housing costs that now look like the primary driver of inflation on the “service” side is interesting given that we are already seeing signs of a cooling housing market. The report therefore really doesn’t point to any alarming sources of accelerating inflation pressure at this point.

Bottom line

Mild inflation alongside low unemployment means less headwinds for consumers who, at the same time, are benefiting from a pick-up in wage growth. For businesses, the key question is how output per hour is evolving: Without a pick-up in productivity, business unit costs would go up, and in the absence of pricing power enabling them to pass on rising costs, pressure on profit margins would be the result. The good news is that output per hour did accelerate in Q2 and Q3 this year. Whether that can be sustained in Q4 and 2019 remains to be seen.

The information and opinions contained herein are for general information use only. MainStay Investments does not guarantee their accuracy or completeness, nor does MainStay Investments assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are as of the date of this report, are subject to change without notice, and are not intended a        s an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. There can be no guarantee that any projection, forecast, or opinion in this material will be realized.

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The U.S. Consumer Price Index (CPI) is a set of consumer price indices calculated by the U.S. Bureau of Labor Statistics (BLS). To be precise, the BLS routinely computes many different CPIs that are used for different purposes. Each is a time series measure of the price of consumer goods and services.

MainStay Investments® is a registered service mark and name under which New York Life Investment Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. Securities distributed by NYLIFE Distributors LLC, 30 Hudson Street, Jersey City, NJ 07302.


Poul Kristensen, CFA

Managing Director, Economist, and Portfolio Manager, New York Life Investment Management

Poul Kristensen, CFA is Managing Director, Economist, and Portfolio Manager with New York Life Investment Management’s Multi Asset Solutions (MAS) team

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