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Lower Inflation An All-Round Bonus For Casinos

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Personal consumption expenditure

The US inflation rate is reported by the U.S. Bureau of Economic Analysis. The recorded inflation rate was 0.8% in December 2014. That’s the lowest it’s been since October 2009 and is mainly attributable to the significant fall in energy prices.

On a monthly basis, consumer prices dropped 0.4% in December—the biggest decline in six years. In contrast, food inflation continued its upward trend, rising 3.4% in December, its largest 12-month increase since February 2012.

Regulatory surveillance

The Fed monitors price increases using the personal consumption expenditure, or PCE, price index. This index measures personal expenditures by individuals for the purchase of goods and services. In the US, the Core PCE Price Index measures the prices paid on domestic goods and services, excluding food and energy.

This price measure continues to run below the US central bank’s 2% inflation target, even though the economy continues to strengthen. Effective November 2014, the Core PCE Index year-over-year change was 1.41% as compared to 1.53% recorded in October 2014.

Key takeaways for casinos

Lower inflation results in lower rates of interest, helping capital-intensive casino companies borrow at cheap rates to finance future operations. As well, when inflation is low, consumers have greater purchasing power, or a higher spending capacity.

Greater purchasing power and lower interest are positive for casino resort companies such as Las Vegas Sands (LVS), MGM Resorts International (or MGM), Wynn Resorts (WYNN), Penn National Gaming (PENN), Pinnacle Entertainment (PNK).

These two factors are also good for the Markets Vectors Gaming ETF (BJK), which has over ~26% exposure to these companies. Another ETF, the Consumer Discretionary Select Sector SPDR Fund (XLY), has ~1% exposure to casino companies.

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