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Embedded Inflation Measure is Trending

CAMS Weekly View from the Corner – Week ending 11/22/2019

November 25, 2019

When it comes to measuring price increases via various inflation indicators there are numerous approaches to doing so.  The bottom line of most is to get a sense of the proverbial “basket of goods and services” to gauge what they are doing trend wise.

For my part, anytime we delve into broad inflation discussions I feel the need to insert that it is not that “prices are rising” but rather the currency the goods and services are priced in is losing more of its purchasing power.

Structurally speaking, in modern economic systems this is by design ala Central Banks the globe over.  In the U.S. the Federal Reserve (U.S. Central Bank) consistently offers its inflation target is “x percent” and they go about setting Monetary Policies accordingly.

Importantly, very importantly, the target rate is always positive because the over indebted economic system has developed into a “must have higher prices” (ala inflation) backdrop lest the economy crashes on itself.

Yes, without inflation growing consistently the economic system crashes as the debt levels would grow larger in what is known as “real terms” which is to say when inflation is factored in.  Simply put, if prices were falling consistently this would evolve into all prices falling including asset prices that underlies many debts.

Reduced to even simpler terms, imagine home prices falling consistently and homeowners being okay with continuing to pay their debt level off on a home that is worth less than the debt they are paying to keep the home.  (Recent history offers in spades how the population responds to such a scenario.)


The Cleveland District Bank of the Federal Reserve System calculates and publishes their Median Consumer Price Index.  This measure adds excellent value in the price trend observation that may be unfolding within society.

It is an embedded measure because, by design, it is meant to identify price trends at a core level.  The Cleveland District Bank analyzes the price change that is in the middle of the long list of all price components.  The median, i.e. the middle gives us a better sense of what is happening deep within price components and their trends.

The above chart dates back to the mid 1980’s for perspective.  The red arrow identifies the trend that has been developing in recent years.  Even more recently this continued to trend higher to the point of now reaching the 3% level.  This established increasing trend is just one factor that had us questioning the Federal Reserve actually cutting interest rates this year.

If this trend continues with this embedded measure it will ultimately show up to the point where the citizenry begins to recognize prices are rising which may be beyond their comfort level.  Rapidly rising inflation, if it takes hold, can create a host of societal and market issues.  We will continue to watch and share as this unfolds.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

Portfolio Manager, CAMS Spectrum Portfolio

Footnote:

H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP).  This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”.  A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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