Mark M. Martiak
Managing Director Investments, AIF®

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© 2018 Mark Martiak, AIF®  |Managing Director Investments

The Cost of Luxury: Is Inflation Connected to Uber Doves?

Friday, January 29, 2016

 

May the New Year bring you greater heights of success and prosperity. Happy New Year...

 

I am sure you’ve received this common New Year greeting before. But as many wish of greater heights of success and prosperity in 2016, this New Year may also bring you greater heights of spending.

 

Many of the goods and services you buy will cost you more in 2016, especially in the luxury realm.

 

Luxury cars, SUV and Truck Sales push pricing to new heights. Watching Super Bowl 50 in a suite at Levi’s stadium costs a whopping $350,000. A price for a Rolex watch once cost $150. Today, the average price of this luxury watch is $7,500. The value of Birkin bags has increased over 500% in the last 35 years, and its value is expected to double in 10 years.

 

So what should we expect in 2016?

 

According to data from the Bureau of Labor Statistics, inflation rose 0.7% in 2015 and economists expect it to rise to 2.4% by the end of 2016. The overall direction of consumer prices in the U.S. economy is up, though categories related to energy costs are experiencing wild fluctuations.

 

In 2015, the flash point signaling higher core CPI may have been in May as the U.S. Consumer Price Index rose just 0.1%, however core prices (excluding food and energy) rose 0.3%, which is outside the high-end forecast and the highest increase since January 2013. Over the last 12 months, the all item index increased 0.5% before seasonal adjustment.

 

The core inflation rate, which excludes food and energy prices, has picked up in the last few months. This rate will rise about 2.2% in 2016.

 

CPI figures suggest that the U.S. can expect food prices to grow by about 1.8% this year, slightly above the 1.5% pace in 2015.

 

U.S. Housing Starts recorded one of the strongest periods in recent years, surging 20% in April to an annual rate of 1.14 million. The strong rental housing market will keep rents rising at a robust pace of 3% to 4% -- strongest in the Northeast and Urban areas of the West—while overall shelter costs will climb 3.4%.

 

The Federal Reserve has primarily influenced overall financial conditions by adjusting the federal funds rate – the rate that banks charge each other for short term loans. This is how monetary policy influences inflation – the Fed adds or subtracts reserves from the banking system, and by doing that, they are able to increase or decrease “aggregate demand” or what we term as “total spending.”

 

Many banks are filled to the top with excess reserves, rarely trading federal funds among each other. The Fed doesn’t cause real, long-term wealth creation, and they never will. It either accommodates growth by printing the right amount of money, thus avoiding deflation, or it prints too much money, which won’t stop growth but will cause inflation.

 

At this point, it appears that the luxury segment is not immune to inflation and doesn't appear likely to experience a slow down. 

 

I guess the Fed Chairwoman Janet Yellen and her predecessor Ben Bernanke chose to be Uber-Doves, despite a real lack of evidence that Fed policy has enabled inflation to take hold in the U.S. at all.   

 

 

 

 

 

Securities offered through: First Allied Securities, Inc. A Registered Broker/Dealer. Member: FINRA / SIPC

Advisory Services offered through: Premier Wealth Advisors, LLC. (PWA) & First Allied Advisory Services, Inc. (FAAS). Both Registered Investment Advisers, RIA's.  PWA is not affiliated with First Allied Securities, Inc and/or FAAS.


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