Inflation: No Pressure

Written by: Global Thought Leadership | February 16, 2018
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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.

 


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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.

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