December 2013 Index

January 30, 2014

2013 Was A Tame Year – On The Inflation Front

Earlier this month, the U.S. Bureau of Labor Statistics published the inflation data for December and all of 2013. The items contained in the BLS’s Consumer Price Index (CPI) were up 0.3 percent in the month of December. At first blush, it struck some people as a large number as extrapolating a series of 0.3 percent monthly increases would get you to a nearly 4 percent annual inflation rate. The truth is that the prices of the hundreds of items tracked in the CPI’s ‘basket’ of goods can be erratic, and you can’t extrapolate individual monthly data points. 2013’s 12-month inflation number was a quite tame 1.5 percent — well below the Federal Reserve’s 2 percent target.

Actually, the inflation measure that the Fed memebers watch more closely than the CPI is the Personal Consumption Expenditures (PCE) price index, and it has been running even lower than CPI. Even though the central bank has plenty of room — from an inflation perspective — to continue to be accommodative, the central bank has announced in the past two months that they will be scaling back their quantitiaive easing (QE) by 20 billion per month. After yestarday’s announcement from the Fed, they will ‘only’ print 65 billion dollars each month to buy treasuries and mortgage backs securities. This does not mean and end to the cheap, easy money that can lead to rising prices in the future.

What’s Next? Rising Inflation, Dreaded Deflation, or More Disinflation?

The Fed is watching the data. Consumers are not just watching the inflation data; they are living with it (and many might take issue with the notion that rising prices haven’t been a problem). Investors are also most certainly watching inflation data as a change in inflation expectations will have a profound impact on the prices of stocks, bonds, commodites, and other assets. At Guild, we were not content to just watch the data. We created an index that can give us a unique peek into the sources of inflation.

In contrast to the government calculated, and smoothed, and adjusted, CPI and PCE indices, we look for inflation in the U.S. economic system with our Guild Basic Needs IndexTM (GBNI). The GBNI is not intended to track the population’s spending patterns; it measures the changing prices of essential living expenditures. As the prices of these essential, basic needs change, the impact is felt by all American individuals, businesses, governments, etc.

The categories and their values within the Guild Basic Needs IndexTM are fixed. There is no seasonal adjusting, smoothing, or replacing of components as you will find in the CPI or PCE. The established and essential nature of the four GBNI categories — Food 30%, Clothing 10%, Shelter 30%, and Energy 30% (including items used for heating, cooking, and transportation). Our index construction may not represent exactly what consumers spend their money on, but every American needs these items regardless of price, and changes in price of these items will ripple throughout the economy.