Corporate's December Report Inflates Inflation Worries
The stark words jumped off the page of the report. "Consumer inflation rose 0.5% in December, the highest monthly gain since June 2009," according to an advisory prepared by Brian Turner of Southwest Corporate Investment Services in Plano, Texas.
The first question for credit union executives-with eyes firmly on the past months of financial distress-is who saw that coming? And the second question: Is it too late to take precautionary steps to protect credit unions from an inflationary spiral?
There were two primary triggers for December's inflation, according to data from the Bureau of Labor Statistics. Energy prices spiked and that accounted for about 80% of the all-items seasonally adjusted increase. Food also ticked up. Most other items were flat or down (used cars, for instance, were down 0.1% in December). This was not an across-the-board increase and, furthermore, said Wai, inflation usually has strong regional accents, where some parts of the country are more affected than others.
And yet inflation definitely poses real risks to credit unions, stressed Wai. A key pressure point, he said, is loan quality. Picture a financially strapped borrower-already sweating to cover a $300 per month auto loan-and suddenly everything he or she buys creeps up, say, 5% in cost. "You want to be sure the cash flow of your borrowers could withstand rapid rises in inflation," said Robert Barone, an economist and a longtime banker in Nevada and California.
In that vein, CUNA Mutual Chief Economist Dave Colby predicted that this year will see an outright decline in mortgage portfolios for the first time in history as credit unions choose to mitigate risks by selling off that paper rather than holding it.
Consumers, too, are showing strong preference for short-term paper when they are looking for places to park cash, said Colby, who indicated credit unions will see lower demand for longer-term certificates of deposit and greater demand for highly liquid instruments such as money market accounts.