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  • Leonard Brecken

Inflation & Rates

The chart below shows a key New York Federal Reserve "Underlying Inflation Gauge" (UIG) barometer that some believe is more detailed and a leading indicator for inflation. Its in Red while the Consumer Price Index (CPI) is in blue and is considered to be the benchmark for consumer inflation. You can see historically how they correlate well and how the Red line often leads where the CPI index goes in the months to come. Tracking inflation in general is important because it not only impacts input costs that impacts gross margins, but also can impact interest rates. As noted in the chart the Red line currently is nearing where inflation was before the US economic crisis in 2007. AT THAT TIME THE FEDERAL FUNDS RATE WAS OVER 5% IN 2006 VS 2% TODAY. Why should this matter? Because IF the correlation holds it may imply even more interest rate hikes ahead. The problem: is the rise in the UIG or the Red line a result of temporary factors from recent trade disputes or something else? I believe it has had some influence as a result of tariffs imposed, the extent of which can be debated. The question is does it imply even higher rates ahead to quell inflation and what will be the negative implications on rate sensitive areas of the economy such as housing.

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