_Gratitude and Inflation

The cost of a Thanksgiving dinner for 10, with all the trimmings, actually fell by 0.5% since last year, according to the American Farm Bureau Federation. Food-at-home prices have fallen an even steeper 2.3%, depressed by a decline in exports for most food and beverage items – as reported by the U.S. Bureau of Labour Statistics and U.S. Census Bureau.

Besides lower food prices, energy prices are unchanged over the past 12 months and 22% below where they were in 2012. And wages are starting to accelerate, up 2.8% over the past 12 months, the largest gain since June 2009.

The commercial real estate industry also has a lot to be grateful for. Property sales prices rose 7.8% over the past year, according to the Moody’s/RCA Commercial Property Price Index (CPPI). Despite tighter lending standards, prices continue to rise, spurred by slow and steady tightening in market fundamentals with the exception of apartments, where a surge in supply has caused softening in some areas. Tighter standards for construction loans have a silver lining: Low levels of new supply support rent increases and limit the potential for overbuilding.

Overall inflation remains low, with the Consumer Price Index (CPI) up just 1.6% over the past 12 months, and the core CPI, which excludes food and energy, up 2.1%. The Federal Reserve’s favourite measure of inflation, the core Personal Consumption Expenditures index (PCE), which uses a different methodology, is up 1.7%, still below the Fed’s informal target of 2.0%.

But inflation could be stirring. The bond market seems to think so, as the 10-year Treasury yield has increased by 41 basis points since the election to its highest level this year, ending Thursday at 2.29%. And the Federal Reserve has all but promised to raise short-term rates by a quarter-point at its December meeting. Investors have become bearish on bonds and bullish on stocks, with the S&P 500 up 2.2% and the total stock market up 3.1% since the election. Investors believe the incoming Trump administration will provide a big dose of fiscal stimulus to the economy in the form of tax cuts and generous outlays for infrastructure and defence, which would, in theory, boost growth, inflation and interest rates. If this scenario plays out, it would mark the end of the “lower-for-longer” narrative that has defined the markets since the recession.

It’s too soon to tell how this new narrative built on fiscal stimulus will unfold. The boost to consumer spending could be smaller than anticipated if most tax cuts flow to higher income households, which would be less likely to spend their windfall than lower and middle income households. Moreover, business tax cuts and an easing of regulations could boost capital spending, which has been lagging, but the costs imposed by trade barriers could cancel out some of this. So the prospects for future inflation and interest rate increases remain cloudy, as one would expect so soon after the election.

All of this will play out over the next few months and years as the Trump administration pursues its priorities and works out its differences with Congress. In the meantime, we can be grateful that the economy has taken the election in stride and may be poised to accelerate.

Written by Robert Bach, Newmark Grubb Knight Frank, Director of Research – Americas.

Read previous U.S. market insights here