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Consumer Inflation in Check, Housing Sector Rebounds, but Growth in Consumer Spending Remains Tepid
Monday, August 25, 2014 6:35 AM

Housing starts for July has reportedly jumped to an annualized pace of 1.093 million units, a +15.7 percent increase over the previous month. And the Labor Department reports consumer inflation continues to rise at a modest pace and remains well within the Federal Reserve’s desired level. However, while both wholesale and consumer inflation have risen close to +2.1 percent over the past year, inflation appears to have had little impact on consumers’ disposable income.

“Unfortunately, growth in consumer spending remains at a very tepid +2.5 percent rate,” notes Brian Turner, director and chief strategist with Catalyst Strategic Services. “Unless consumer spending rebounds dramatically during the first half of 2015, any rise in short-term interest rates is likely destined for late 2015 or even early 2016. This would permit credit unions to retain a short funding duration without creating adverse impact on future cost of funds. As interest rates begin to rise, credit unions will experience wider net interest margins as asset yields advance at a faster pace than cost of funds.”

According to Turner, unstable spending could be problematic for the Federal Reserve and its desire to see short-term interest rates start to increase during the second half of 2015. If consumer spending remains weak in late 2015, higher short-term rates could put economic recovery at risk. Inflation rates beyond 2.5 percent would have the same adverse impact on the economy. This challenge is reflected in the latest FOMC minutes where the Fed declares that its asset purchase program and policy accommodation plans are highly data dependent.