Deflation for the first time since 2009: Will it help casinos?

Inflation rate

The U.S. Bureau of Economic Analysis reports inflation rate in the United States. The rate came in at -0.1% in January 2015. For the first time since December 2009, the United States has entered into deflation. It’s the lowest figure since October 2009.

The low figure is mainly attributable to a significant fall in energy prices. On a monthly basis, consumer prices dropped 0.7% in January 2015 from December 2014, the biggest decline in six years. In contrast, food inflation continued its upward trend, rising 3.2% in January.

Deflation for the first time since 2009: Will it help casinos?

Personal consumption expenditure

As the economy continues to strengthen, 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 United States, the Core PCE price index provides a measure of the prices paid by people for domestic purchases of goods and services, excluding the prices of food and energy.

This price measure continues to run below the Federal Reserve’s 2% inflation target. As of December 2014, the core PCE index year-over-year change was 1.33% compared to 1.40% in November 2014.

Diane Swonk, chief economist at Mesirow Financial in Chicago. said, “We believe the Fed will wait until September before achieving liftoff on interest rates and, even then, the process of normalization will move at a glacial pace.”

Key takeaways 

When inflation is low, consumers have greater purchasing power, or a higher spending capacity. Greater purchasing power is a positive sign for casino resort companies such as Las Vegas Sands (LVS), MGM Resorts (MGM), Wynn Resorts (WYNN), Penn National Gaming (PENN), and Pinnacle Entertainment (PNK).

The VanEck Vectors Gaming ETF (BJK) has more than 20% exposure to these companies. The Consumer Discretionary Select Sector SPDR Fund (XLY) provide a broader exposure to the leisure industry.

Low inflation results in lower interest rates, which could help capital-intensive casino companies borrow at cheap rates in order to finance their future operations.