Strategy & economics

Chart of the month - March

US core CPI breakdown

31/03/2016

Janet Mui

Janet Mui

Global Economist

Although US headline CPI inflation slowed from +1.4% YoY to +1.0% YoY in February 2016, this was mostly due to lower energy prices. To gauge the underlying trend in US inflation, we focus on core CPI which excludes food and energy. This measure of inflation picked up more than expected from +2.2% YoY to +2.3% YoY, which was the fastest rate since May 2012.
Looking at two key components of core CPI:

  • services inflation was up from +2.5% YoY to +2.6% YoY, led by primary and owner-equivalent rents, which were up +3.2% YoY; and,
  • medical services costs were up 3.9% YoY.

We think the trends in housing and medical costs (which have core CPI weightings of 42.2% and 8.4% respectively) are two important components to watch as they pose the biggest upside risks to core inflation.

The US personal consumption expenditure core price index (PCE core), is the measure of prices that the Federal Reserve (Fed) targets. It is rising at the fastest pace in more than three years. Interestingly, with PCE core inflation currently at 1.7%, it is already a tenth above the Fed’s target for the end of 2016. Core CPI and PCE core both suggest underlying inflationary pressure is building, something that the Fed will find hard to ignore if wage growth picks up further toward 3%.

What are the policy implications? In March, the Fed reduced its profile for the expected path of interest rates. This appears to have been in response to market worries relating to domestic and international growth. However, the more benign policy profile also implies reduced concern about the inflationary implications of the continuing tightening in the labour market.

We believe the Fed is underestimating the risk of inflation. Furthermore, there is little evidence of a second round disinflationary effect from lower oil prices, and indeed, rising oil prices could now push headline inflation higher. While the Fed may feel that current circumstances justify delaying further rate rises, there is a risk that it will have to become more aggressive later in the tightening cycle inflationary pressure continues to build.

Source of figures: Datastream

Author

Janet Mui

Janet Mui

Global Economist

Janet is an Economist working in the Investment Strategy Team and a CFA charterholder. She joined in 2011 and previously worked in Citi Hong Kong as an analyst in Global Portfolio Management and subsequently as a relationship manager to multi-national clients. Janet graduated with a BSc in Economics from the London School of Economics (first class honours), holds an MBA in Finance from the University of Cambridge and obtained a Postgraduate Certificate in Econometrics from Birkbeck College, University of London.

This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 12 Moorgate, London, EC2R 6DA. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. 

Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.

This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.

All data contained within this document is sourced from Cazenove Capital unless otherwise stated.

Contact Cazenove Capital

To discuss your wealth management requirements, or to find out more about our services and how we can help you, please contact:

John Gordon

John Gordon

Business Development Director
Telephone:
john@cazenovecapital.com
James Gladstone

James Gladstone

Head of Wealth Planning
Telephone:
james@cazenovecapital.com