Front Barnett

Statement of Investment Policy

February 22, 2018 - Since the release of January’s inflation reports showing growing wage gains and an increase in consumer prices, there has been a rising undercurrent of concern among investors that our economy, operating at full employment and about to receive a jolt of fiscal stimulus from the recently enacted tax reform package, will begin to experience higher than forecast inflation causing the Federal Reserve to become more aggressive than previously expected in its withdrawal of monetary accommodation. There are some recent signs of increased inflation in the Consumer Price Index (CPI):

  • • Tangible increases in many basics, particularly clothing, led to a strong 0.5% month-over-month jump in consumer prices in January. This is the highest monthly CPI reading since early in the economic expansion nearly 5 years ago. The more closely watched core CPI, which excludes food and energy, showed a 0.35% increase. This is the highest core CPI reading since the peak of the prior expansion, 12 ½ years ago.
  • • However, the year-on-year inflation rates, the common language for inflation, demonstrate less pressure, holding just above the Fed’s 2.0% goal at 2.1% with core CPI inflation slightly more favorable at 1.8%. The Fed’s expectations, outlined in their January FOMC statement which marked the opening move in the inflation scare, call for inflation to move up and “stabilize” around 2.0%. The slight upward drift for the core CPI would appear to be in line with the Fed’s outlook and consistent with gradual rate increases this year.
  • • The Fed’s preferred inflation gauge, the Personal Consumption Expenditures Index (PCE), is running several tenths below the CPI, and below the Fed’s 2.0% target.

For the rest of the letter, download the PDF here.

Front Barnett Associates Commentary