Weekly Edge: Inflation Pressure May Be Building In The U.S. Economy

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by: Invest With An Edge

Originally published on April 11, 2018

By Troy Tanzy

Co-authored by Daniel Rangel

Core inflation was back above 2% for March, according to the latest inflation report which came out Wednesday morning. The Consumer Price Index (CPI) was down slightly in March (down 0.1% month over month), but the core inflation rate rose 0.2% for the month. According to TD Economics, a 4.9% drop in gasoline prices held the CPI level relatively constant to slightly down.

The rise in core inflation is reflective of higher prices in housing, medicine, and food, the Wall Street Journal reported. Other increases include prices of lodging, auto insurance, and personal care. Prices for apparel, communication, used cars, education, and tobacco decreased slightly over the month. Excluding food and energy, March core inflation rose to 2.7% in March. It is worth noting there may not be as significant a change as announced, as the calculations for inflation changed during March. Declines in cellphone contracts during the spring of 2017 due to price competition between wireless providers such as AT&T (NYSE:T), Verizon (NYSE:VZ), and T-Mobile (NASDAQ:TMUS) caused inflation to weaken last year. Last month, the effects of price reductions in cellphone contracts were not reflected in the inflation outlook. In other words, calculation changes may be affecting the change in annual inflation compared to last year more than actual changes in inflation.

Federal Reserve officials have already taken note of the increase in core inflation. Minutes from the Federal Reserve Open Market Committee's latest meeting are due out Wednesday (4/11) afternoon, which may shed some light on the Fed's expectations for inflation moving forward and possible policy plans to address an uptick in inflation.

Following a Federal Funds rate increase in March, the Fed is expected to raise rates at least two more times in 2018, as it sees inflation continue to rise to its target rate. As long as inflation continues to rise, the Federal Reserve will look to raise rates - in part as a defensive tactic in case of an impending recession, and also as a preventative measure to rein in an economy that is heating up.

Investors reacted poorly on Wednesday morning (4/11) following the inflation announcement, bringing each of the three major U.S. stock market indexes down. Markets are generally seen as forward-looking, so the reaction may be indicative of increasing inflation expectations moving forward.

Sectors: Among the Sector Benchmark ETFs, the average momentum score went from -17 to -7.82. The results for the sectors were positive for the week. Utilities and Industrials gained the least, both up by 1 point. Telecom increased the most for the week, up by 20 points. The leaders for the sectors are Energy and Utilities. Defensive and cyclical sectors both gained. Sensitive sectors as a whole increased by 45 points. All of the sectors, except Energy and Utilities, are in the red. Materials is now at the bottom of the sectors. The overall increase in sectors seems to indicate an appetite for risk.

Factors: Among the Factor Benchmark ETFs, the average factor score increased from -13.3 to -5.82 last week. All of the factors increased for the week. Value increased the most, up by 10 points. Low Volatility and Growth increased the least, both up by 5 points. Momentum and High Beta now remain at the bottom, and all factors continue to be in the red.

Global: Global Benchmark ETF momentum scores were mixed for the week. The average score by country increased from -9.36 to -1.55. This week, two of the three top positions were developed countries. The UK is now at the top after gaining 19 points last week. Next are Latin America, which lost 2 points, and the eurozone, which gained 13 points. Latin America is the only global area that decreased for the week. The bottom of the ranks consists of China, the U.S., and Canada. This week, 6 out of the 11 global areas were in the red - an improvement over last week's 10.

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