Shelter Costs Are Rising

US consumer prices were little changed in July as a whole.

However, what is buried inside this number is of some interest:

Shelter costs, which account for approx. 1/3 of the Consumer Price Index rose by .4% after an increase of .3% in June.

A rental vacancy rate at a 22 year low is driving rents higher: they were up .3% in July.

One of our add on "Themes" for 2015 is that the US Consumer (who has historically represented close to 2/3 of the US economy) demographic is changing structurally: Baby Boomers, the once "big spenders" are focused on retirement and not out-living their savings and that the now biggest cohort, the Millennial's, do not have the earning power, have significant student debt, expensive rent and generally different spending priorities.

So expectations of a rebound in consumer spending to drive the US economy may be over blown.

Add to that the increase in the value of the $US for emerging economies, China, Europe and Canada (and the current sate of their respective economies) and the potential consumer for US exports diminishes as well.

In July, US consumers were upbeat, increasing spending on automobiles and at restaurants, but it is difficult to see how that will be able to continue to drive spending down the road given what is going on in the global economy.

The "wealth effect" of better asset prices (since 2009) has not been significant as the "wealth gap"  (between the wealthy and the middle class) has widened and consumer spending has not rebounded to the same degree as in previous economic recoveries.

With that in mind, the majority of economists suggest that a 1/4% increase in the Fed Funds rate by the Federal Reserve will have a limited impact on the consumer and expect that this will allow them to move in September.

Interestingly, investors are split on the Fed's move.

If the Fed does move in September, then markets may be in for more of a shock.

Stay tuned!

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