Finance

July inflation drops below 3% as Fed considers September rate cut

Published

5 months ago

August 15, 2024

Business Finance News

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Shelter costs are still high, but insurance rates are finally moderating. (iStock)

The annual inflation rate fell below 3% in July for the first time in over three years, according to the Consumer Price Index (CPI) released by the Bureau of Labor Statistics (BLS).

On an annual basis, prices rose 2.9% in July, a slight softening from the 3.1% growth the previous month. On a monthly basis, prices increased 0.2% after dipping 0.1% in June. The last time the overall CPI inflation rate was less than 2.9% was in March 2021. Core inflation, which excludes more volatile food and energy prices, increased 0.2% monthly in July.

Inflation is moving closer to the Federal Reserve’s 2% target, but prices remain high on many essentials. The stickiest piece of the puzzle remains shelter costs, which rose by 0.4% in July and accounted for 90% of the monthly inflation increase. It also rose more than 5% over the past year.

“That’s significant as it represents an outsized part of the index, but shelter costs are also notoriously hard to measure accurately and are often perceived to move with a lag,” according to Jim Baird, Planet Moran Financial Advisors chief investment officer. “Other indicators suggest shelter costs are well positioned to fall further in the months ahead.”

Still, July’s inflation reading will likely give the Federal Reserve the evidence to green-light a rate cut in September and may trigger additional cuts before the year ends.

“Finally, the rate of price increases at the cash register continues to slow down after a couple of years of painful surges, signaling a victory for the Fed’s monetary policy,” CoreLogic Chief Economist Selma Hepp said. “This means for the average American that the Fed will likely cut interest rates next month, which will slightly bring down the cost of borrowing; a good step for auto and home sales, in particular.”

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Car insurance rates are finally slowing down

Consumers may start to see some easing in car insurance costs, one of the greatest drivers of overall inflation for months, according to Jerry’s Vice President of Insurance Operations Josh Damico. Although July’s 18.6% increase is still hard on consumers’ wallets, Damico said it is encouraging that cost spikes are finally slowing.

Insurance costs have skyrocketed in the last few years as inflation has driven up the costs of auto repairs and drivers submit more extensive claims. However, car repair costs and vehicle prices are stabilizing, which offers signs of hope, Damico said.

“Several carriers I’ve spoken with have started lowering rates, and many more in our network are telling us they’re re-evaluating increases they have taken or had planned to take in the future,” Damico said. “It seems we’ve turned a critical corner and American drivers can expect some relief.”

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Mortgage rates head in the right direction

Mortgage rates have moved in sync with the positive economic indicators and it becomes more apparent that the Fed will begin to ease its monetary policy this year.

The decline in mortgage rates, combined with a growing supply of housing inventory, should help increase prospective homebuyers’ appetites and give existing homeowners the opportunity to refinance.

“In the medium-run, we expect the economy to land softly and housing inventory to continue to recover,” Realtor.com Senior Economist Ralph McLaughlin said. “This should put downward pressure on mortgage rates this fall and winter and will set the stage for a much better season for homebuyers in 2025.”

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Finance

Exchange-traded funds have ‘tax magic’ that many mutual funds don’t offer

Published

1 hour ago

December 30, 2024

Business Finance News

Israel Sebastian | Moment | Getty Images

Investors who hold exchange-traded funds can often escape a tax bill incurred by those with mutual funds, which are generally less tax efficient, according to investment experts.

ETFs and mutual funds are baskets of stocks, bonds and other financial assets overseen by professional money managers. But they have a different legal structure that bestows ETFs with a “tax magic that’s unrivaled by mutual funds,” Bryan Armour, the director of passive strategies research for North America and editor of the ETFInvestor newsletter at Morningstar, wrote this year.

That tax savings relates to annual capital gains distributions within the funds.

Capital gains taxes are owed on investment profits.

Fund managers can generate such taxes within a fund when they buy and sell securities. The taxes then get passed along to all the fund shareholders, who owe a tax bill even if they reinvest those distributions.

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The ETF tax advantage is by virtue of “in-kind creations and redemptions,” which essentially provides for tax-free trades for many ETFs, experts explain. (The ETF’s in-kind transaction mechanism is somewhat complex. At a high level, it involves large institutional investors called “authorized participants,” which create or redeem ETF shares directly with the ETF provider.)

The tax advantage is generally most apparent for stock funds, they said.

For example, more than 60% of stock mutual funds distributed capital gains in 2023, according to Morningstar. That was true for just 4% of ETFs.

Less than 4% of ETFs are expected to distribute capital gains in 2024, Morningstar estimates. Such data isn’t yet available for mutual funds.

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Here’s a look at other stories offering insight on ETFs for investors.

Importantly, this tax advantage is only relevant for investors holding funds in taxable accounts, experts said.

It’s a moot point for retirement account investors like those with a 401(k) plan or individual retirement account, which already come with tax benefits, experts said.

The tax advantage “really helps the non-IRA account more than anything,” said Charlie Fitzgerald III, a certified financial planner based in Orlando, Florida, and a founding member of Moisand Fitzgerald Tamayo.

“You’ll have tax efficiency that a standard mutual fund is not going to be able to achieve, hands down,” he said.

However, ETFs don’t always have a tax advantage, experts said.

For example, certain ETF holdings may not be able to benefit from in-kind transactions, Armour said.

Examples include physical commodities, as well as derivatives like swaps, futures contracts, currency forwards and certain options contracts, he said.

Additionally, certain nations like Brazil, China, India, South Korea and Taiwan may treat in-kind redemptions of securities domiciled in those countries as taxable events, he said.