In the United States, economic data surprised to the upside in the second quarter, including data in purchasing managers’ indexes, labor market dynamics, auto sales, and a variety of housing-market metrics. However, food costs contributed positively to inflation, largely because extreme drought in California pushed up fruit and vegetable prices, while cost trends in the housing sector contributed to core inflation levels.
The Fed shrugs off core inflation’s recent rise
U.S. policy tends to look through the food-related cost pressure as it focuses on core inflation, which excludes the volatile food and energy components. Moreover, the Fed uses the PCE (personal consumption expenditure) deflator to measure inflation, which puts a higher weight on medical costs and a lower weight on shelter prices, such as housing, than does the CPI. As an example of this tendency to downplay CPI, Fed Chair Yellen referred to the May inflation data (2.1% headline, 2.0% core) as “noise.” Of course, this overlooks the fact that the May rise in core prices was among the largest in a decade, and double the 10-year average. If one looks at the past 120 inflation observations, the chance of seeing a May-type increase is 5%.
European inflation may bottom out this summer
In Europe, the pattern of real growth is largely flat, despite standout strength in Spain and Germany and renewed weakness in France. The same goes for inflation.
We think inflation in the United Kingdom and the eurozone will bottom during the summer. Potential upward pressure from energy and food prices is something to monitor later in the year. Having said that, the disinflationary threat that prompted the European Central Bank’s recent policy-easing decisions is not likely to go away, in our view, given the region’s nontrivial economic weakness.
Read Putnam's Q3 2014 Fixed Income Outlook on Slideshare or download the complete pdf at putnam.com.
290085
For informational purposes only. Not an investment recommendation.
This material is provided for limited purposes. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or any Putnam product or strategy. References to specific asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or investment advice. The opinions expressed in this article represent the current, good-faith views of the author(s) at the time of publication. The views are provided for informational purposes only and are subject to change. This material does not take into account any investor’s particular investment objectives, strategies, tax status, or investment horizon. Investors should consult a financial advisor for advice suited to their individual financial needs. Putnam Investments cannot guarantee the accuracy or completeness of any statements or data contained in the article. Predictions, opinions, and other information contained in this article are subject to change. Any forward-looking statements speak only as of the date they are made, and Putnam assumes no duty to update them. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties. Actual results could differ materially from those anticipated. Past performance is not a guarantee of future results. As with any investment, there is a potential for profit as well as the possibility of loss.
Diversification does not guarantee a profit or ensure against loss. It is possible to lose money in a diversified portfolio.
Consider these risks before investing: International investing involves certain risks, such as currency fluctuations, economic instability, and political developments. Investments in small and/or midsize companies increase the risk of greater price fluctuations. Bond investments are subject to interest-rate risk, which means the prices of the fund’s bond investments are likely to fall if interest rates rise. Bond investments also are subject to credit risk, which is the risk that the issuer of the bond may default on payment of interest or principal. Interest-rate risk is generally greater for longer-term bonds, and credit risk is generally greater for below-investment-grade bonds, which may be considered speculative. Unlike bonds, funds that invest in bonds have ongoing fees and expenses. Lower-rated bonds may offer higher yields in return for more risk. Funds that invest in government securities are not guaranteed. Mortgage-backed securities are subject to prepayment risk. Commodities involve the risks of changes in market, political, regulatory, and natural conditions. You can lose money by investing in a mutual fund.
Putnam Retail Management.