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Inflation – Here to Stay or Just Passing Through?
 

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Inflation has become the single most important measure of the economy this year, especially the closer we get to a Federal Reserve meeting. As critical as it is to get this indicator right, it is becoming more difficult. And Mother Nature will create additional challenges in the coming months. Both the consumer and producer inflation indices posted the largest gains in months during August. PPI rose 0.2 percent, the strongest reading in four months, while CPI increased 0.4 percent, its biggest jump since January. In both cases, most of the increase came from the energy sector, more specifically, gasoline prices. Gasoline costs on the wholesale side rose 9.5 percent and increased 6.5 percent on the consumer side. Gasoline prices usually begin to abate this time of year, as the vacation season winds down. Economists suspect Hurricane Harvey may have contributed a little to the sudden rise in prices, even though most of the data was collected before the hurricane. Another early effect of the storm was the sudden rise in hotel costs, up 5.1 percent. This was the largest increase since 1991.

The puzzle economists will have to unravel in the coming months is how much impact Hurricanes Harvey and Irma will have on inflation. There will certainly be price distortions for several months to come in many sectors – gasoline, building materials, automobiles and housing, to name a few. The question is whether the price increases will remain, as a large part of the country struggles to rebuild itself, or last only temporarily. What will help is keeping an eye on the big picture. The year-over-year core CPI rate has remained stable at 1.7 percent for four months. A few months’ variation may not have as much of an impact as the Federal Reserve would like.

Other Key Indicators this Week:
 

Retail Sales – Economists’ optimism over renewed consumer spending dampened with the August retail sales report. Not only did sales decline 0.2 percent in August, but also sales revised lower for June and July. The slowdown suggests consumption in the third quarter will be weak, bringing GDP closer to a two percent range. Sales should rebound in September and October due to rebuilding activity from the hurricanes, but the weakened momentum before the harsh weather doesn’t bode well for continued strong consumption. A 1.6 percent drop in auto sales led the decline in August sales, followed by declines in building materials, garden supplies, electronics and apparel. Even internet sales declined, falling 1.1 percent. Gasoline stores posted the largest increase of the sectors due to higher gas prices.

Consumer Sentiment – Consumers remain optimistic about the current economic condition, but not as positive about the outlook down the road. The University of Michigan Consumer Sentiment Index fell to 95.3 from 96.8 in the preliminary September survey. The reading on current conditions rose to the highest measure in over 17 years, driven mostly by stronger financial situations. When asked about future conditions, respondents expressed concern over the outlook for the economy, pushing the measure lower by 3.7 points. Only nine percent of those surveyed mentioned the hurricanes as having any impact, although many of those directly affected could not be reached. Previous surveys following Hurricanes Katrina and Sandy showed the negative impact from the storms to be short lived.

Sarina Freedland – Senior Investment Officer

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