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U.S. Inflation Remains under Control; No Change in FOMC Policy
Monday, November 4, 2013 7:00 AM

The Commerce Department released reports last week showing the nation’s inflation profile remains well in check. Wholesale inflation declined 0.1 percent in September, after jumping 0.6 percent the month before. Energy prices rose 0.5 percent following a surge of 0.8 percent in August. Core wholesale prices, that exclude food and energy costs, increased a modest 0.1 percent.

Consumer inflation increased 0.2 percent in September, a slight increase over the 0.1 percent pace experienced in August. Gasoline prices rose 0.8 percent and food prices were unchanged. Core consumer prices similarly increased 0.1 percent.

Over the past 12 months, wholesale inflation has increased 0.3 percent. Core wholesale prices have increased 1.2 percent. Consumer inflation slowed to 1.2 percent through September, from 1.5 percent in August. The core consumer prices have risen 1.7 percent.

The FOMC met last week and released a statement that virtually mirrors its previous meeting’s announcement. They acknowledged the economy’s modest pace of growth and elevated unemployment rate. While referring to pockets of improvement, they also concede there are "downside risks to the outlook." They reiterated their plan to continue its repurchase program (commonly referred to as QE3) in an effort to keep longer-term rates down to "promote a stronger economic recovery."

Brian Tuner, director and chief strategist with Catalyst Corporate FCU, cautions credit unions that managing inflation can be very complicated and requires a balanced approach.

“The economy requires an element of inflation to promote economic growth. At the same time, it has the potential for diluting household spending power by diminishing disposable income,” notes Turner. This would have a negative impact on consumer spending and eventually factor into both loan and share growth.”

Fortunately, Tuner adds, the Fed’s report shows inflation is not having an adverse impact on disposable income yet the economy continues to reflect weak (and volatile) consumer spending. The weak employment sector continues to prompt a sentiment of job insecurity which tempers spending behavior.

“The credit union industry’s loan demand and share growth continue to be volatile, especially for those $100 million or less in assets, and strategic challenges remain as falling net interest margins are combined with fixed overhead costs,” adds Turner.

On a more positive note, Turner says short-term rates remain down, which helps to minimize cost of funds, while intermediate/long-term rates are higher, and consumer delinquency has declined, which helps to stabilize net interest spread.

“However, in that the Mortgage Bankers Association expects a 32 percent decline in mortgage applications next year, for the credit union industry to experience positive loan growth in 2014, it will have to find a way to increase its current 9 percent consumer loan market share,” points out Turner.