Inflation Growth is a Mixed Bag

Rising consumer prices reduce discretionary income but grow short-term loan demand.

August 22, 2013

Consumer prices increased 0.2% during July with across-the-board gains—gasoline, housing, clothing, and food.

Excluding the volatile, commodity-driven food and energy sector, core inflation also rose 0.2%.

The overall increase was less than what was experienced in June but unchanged regarding core prices. In July, gasoline prices rose 1%, down from a 6% increase in June, and food prices increased 0.1%, cutting in half June’s increase.

Over the past 12 months, overall consumer inflation has increased 2% while core inflation rose 1.7%. Both are under the Federal Reserve’s target limit of 2.5%.

CU implications

Changes in consumer prices have a two-pronged impact on member behavior and the state of the economy.

Rising prices have the capacity to dilute member households’ disposable income.

This can do one of two things:

The latter has the propensity to enhance loan demand (temporarily) while the former moderates growth.

Yet a certain level of inflation is needed for the economy to grow. Therefore, the ability to balance these is important.

The industry experienced a relatively unseasonable growth in loans during the first quarter, probably due to pent-up demand and aggressive marketing campaigns.

Yet larger credit unions (those with $500 million or more in assets; 7% of all credit unions) experienced most of that growth, according to NCUA. The data suggests that the remaining 93% may have collectively experienced declines in loans outstanding.

Looking ahead, it will be important to monitor whether the unseasonable growth during the first quarter was due to demand destined for later this summer or early fall, and whether the growth during the first half of the year is sustainable.

BRIAN TURNER is director and chief strategist for Catalyst Strategic Solutions. Contact him at 214-703-7881.