Friday, September 15, 2006

Inflation or Lack Thereof

The Labor Department reported the Consumer Price Index this morning rose 0.2% in August:


The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in August, before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The August level of 203.9 (1982-84=100) was 3.8 percent higher than in August 2005.

Energy was only up 0.3% in August vs a 2.9% increase in July and of course we've seen a significant drop since August so inflation continues to moderate. We have stated previously that we believe inflation peaked in April or May and we continue to believe that to be the case.

The tame CPI and slowing economic growth should continue to keep the Fed on the sidelines. Industrial production and capacity utilization were also reported today and while production dropped 0.1% that was mostly due to a drop in utility output as the summer heat waves passed. Manufacturing output was flat vs July but up 5.4% year over year. Capacity Utilization was down slightly to 82.4%. All this points to an economy that is slowing but not falling into recession, which is what the Fed is expecting.

Our current investment stance is unchanged: underweight commodities and REITs and overweight Large Cap. Small cap is slightly underweight. We believe that as the economoy slows, investors will move toward the larger company stocks and away from the more economically sensitive small caps. While we don't expect a significant fall in the small cap indexes we do believe that Large Cap will continue to outperform as it has over the last year and by an increasing amount as the year progresses.

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