Inflation: No Pressure

Written by: Global Thought Leadership | February 16, 2018

Source: Bloomberg, Federal Reserve, Feb 15, 2018. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The Bottom Line

  • The February market correction has thrust inflation onto center stage as a key driver of investor expectations.
  • One widely-watched driver of inflation is manufacturing capacity.  The logic: as manufacturing operations approach full capacity, manufacturers need to invest in more plants and capital equipment, and to pay up for labor as workers become harder to hire.
  • That assumes increased demand for manufactured goods – giving manufacturers greater leverage to make price increases stick. So capacity utilization can be a useful way of measuring inflationary pressure on the economy as a whole.
  • By this measure, there’s little to suggest more than mild inflationary pressure by historic standards. For the month ended Jan 30, 2018, capacity utilization stood at 76.2% -- notably below the long-term average of 78.3%, and well below the 80% threshold believed by many to be the tipping point for inflationary pressure on the overall economy.
  • That’s somewhat at odds with market-based inflationary expectations, which have ticked up in recent weeks – perhaps reflecting a shift in sentiment more than a shift in economic reality.
  • Weighing the difference between economic data and fickle market prices is one of several key skills that active managers can bring to bear in service to the longer-term objectives of investors.



U.S. Treasury Inflation Protected Securities (“TIPS”) are bonds that receive a fixed, stated rate of return, but they also increase their principal by the changes in the CPI-U (the non-seasonally adjusted U.S. city average of the all-item consumer price index for all urban consumers, published by the Bureau of Labor Statistics). TIPS, like most fixed income instruments with long maturities, are subject to price risk.

Active management does not ensure gains or protect against market declines.

U.S. Treasuries are direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasury securities, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.

IMPORTANT INFORMATION: All investments involve risk, including loss of principal. Past performance is no guarantee of future results. An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not  take into account the particular investment objectives, financial situation or needs of individual investors.