Halloween & Inflation

Choosing what we would rather do or not do is often a choice we don’t get to make. We are required to do certain things. And yes, from time to time, we are required to be patient. Patience demonstrates response rather than reaction. Deferred gratification we should have learned about early on, is a subset of patience that brings compounded rewards in our adult life. Thinking through problems and responding in a measured way seems to work best. Patience has its rewards.

Third quarter US GDP came in with a very nice number last week at 3%. This was better than most had expected given the severity of the weather during the period. The world is also doing well as the IMF raised its outlook for global growth to 3.7%. Equity markets have taken notice as growth throughout the world seems to be on the rise. President Trump’s tax initiatives get credit for some of the rise, but not all. The synchronized efforts of the world’s central banks seem to finally be working. The Fed has been patient for a long time, waiting for growth to produce some evidence of inflation. That time may have finally arrived. Yet they (Yellen) has been the subject of much criticism surrounding how monetary policy has been conducted. Many are impatient to see a more rules based approach to how policy is conducted. The Fed seems to understand that inflation is like the flu: curable with proper procedures. And that deflation is like the black plague: only ending when it has run its course. It’s a pick your poison world we live in. It’s also a world, like it or not, where we can see and experience a lot of history as it happens.

Four things are happening now that may affect the behavior of the Fed and ultimately the behavior of the markets. Inflation has not been a problem for quite some time. At least not the type of inflation we experienced pre-Mr. Volcker. But things have changed and we’re finally getting what the central banks have been anticipating for a long time.

• First, wages are increasing. They’re on pace for a 2.9% YOY gain, and in the last quarter have accelerated to a 4.3% pace.
• Second, firms are paying more for raw materials with prices rising faster than they have in over five years.
• Third, the much talked about shortage of rental properties is putting pressure on the shelter component of CPI, which makes up a third of the total number.
• And finally pricing pressure in many industries is coming to an end. The global glut of supply because of technology and free trade has removed many of the weak players either via abandonment or merger.

All this tells me is that inflation is more present than it has been for quite some time. Markets know that the Fed runs the game and that the Fed has been patient. The markets won’t like a Fed that has lost its patience.

LaSalle St. Investment Advisors, LLC
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Elmhurst, IL 60126