VALENTINE S DAY INFLATION

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1 LPL RESEARCH PRIVATE CLIENT THOUGHT LEADERSHIP INSTITUTIONAL INSIGHTS INFLATION February 2016 LPL RESEARCH S INDEX TRACKS THE COST OF FOUR TYPICAL GIFT CATEGORIES OVER TIME: THE COST OF A NIGHT IN, A NIGHT OUT, JEWELRY, AND TRAVEL. It is not often that a mundane financial market concept like inflation crosses paths with a very real part of our everyday lives. Inflation is often thought of as a bogeyman that erodes our financial well-being and causes us to work harder to make sure we keep up. Price increases are averaged into one of several widely followed inflation indexes and reported throughout financial markets and the popular media so we know the inflation rate, which affects our cost of living and influences investment decision making. Inflation gets more interesting if we apply it to upcoming purchases and how it may impact gift giving for Valentine s Day, the fourth busiest shopping holiday behind Christmas, back to school, and only marginally Mother s Day. When measuring cost increases over time, the rate of inflation, most investors think of the Consumer Price Index (CPI). The CPI is a broad measure of price changes on over 200 items (yes, more than 200), organized into eight broad categories that include apparel, housing, recreation, and transportation. If there is an item for sale to consumers, the cost is likely tracked by the CPI. Digging into the CPI may help answer the question of what to buy a significant other for Valentine s Day. By taking a look at several Valentine s Day themed items measured by the Bureau of Labor Statistics (BLS) in the CPI calculation, we may be able to add some insight on gift giving for this upcoming holiday. 1 PRICES FOR COMMON GIFTS INCREASED BY 1.3% IN 2015, MORE THAN OVERALL LEVEL OF INFLATION Price of a Basket of Four Gift Categories, Year-over-Year % Change 4.5% % Source: LPL Research, Bureau of Labor Statistics 02/02/16 Data as of 12/31/15.

2 Valentine s Day Index LPL Research s Valentine s Day Index tracks the cost of four typical Valentine s Day gift categories over time: the cost of a night in, a night out, jewelry, and travel. Each of the four gift ideas is comprised of several items, which are measured by CPI data. Grouping items together in the Valentine s Day Index [Figure 1] showed Valentine s Day inflation increased by 1.3% in 2015, a faster rate than the overall level of inflation (0.7%), but less than core inflation (2.1%), which removes the impacts of volatile food and energy prices. See the infographic on page 3 for the full breakdown of the four Valentine s Day gift categories. A NIGHT AT HOME For those looking to avoid crowded restaurants, the cost of creating a romantic experience at home has grown very slowly over the past seven years. We assess the cost of a night at home with four common gifts: candy, flowers, a home cooked dinner, and a bottle of wine or champagne. Of these items, food is the most volatile. Wine, on the other hand, not only experienced a price decline in 2015, but also showed the slowest growth over the full 15-year period, gaining an average of 0.6% per year. A NIGHT OUT ON THE TOWN Our night out on the town category, which includes dinner at a restaurant, movie tickets, and child care, has seen the largest average yearly increase of any of our Valentine s Day gift options, increasing by an average of 3.1% per year over the past 15 years. In 2015, price increases accelerated above the long-term average, gaining 3.6%. These price increases are also notably above the overall level of CPI inflation. The increase in the cost of child care has been the strongest driver, followed closely by price increases at full-service restaurants. GIFT GIVING HIGHLIGHTS For those contemplating a large Valentine s Day gift for that special someone, this would appear to be the year to do it. The cost of travel and jewelry has been falling for the past few years, which is perhaps no surprise given that precious metal and oil prices have declined. If it seems like dinner and a movie cost more and more each year, that s because they do the cost of our night out category hasn t dropped in the entire 15- year history of the index. A night at home has also increased in cost in 13 of the last 15 years, though at a slower overall pace than a night out. 02

3 How Do You Want to Spend Your Valentine s Day? Price, Year-over-Year % Change 6.0 % - 0.8% OUTSIDE OF THE LAST RECESSION, THE COST OF A NIGHT AT HOME HAS GROWN VERY SLOWLY % % THE COST OF A NIGHT OUT HAS ACCELERATED 8.0% % NOW MAY BE THE TIME FOR JEWELRY 7.0 % % THE COST OF A TRIP HAS DECREASED IN RECENT YEARS Source: LPL Research, Bureau of Labor Statistics 02/02/16 CPI price index levels for a night in include candy and chewing gum, wine at home, indoor plants and flowers, and food at home. Data as of 12/31/15. CPI price index levels for a night out were child care and nursery school, full-service meals and snacks, and admission to movies, theaters, and concerts. Data as of 12/31/15. Data reflect the jewelry item in the CPI basket. Data as of 12/31/15. CPI price index levels for travel were full service meals and snacks, other lodging away from home including hotels and motels, and airline fare. Data as of 12/31/15. 03

4 GOOD THINGS COME IN SMALL PACKAGES While jewelry is a big ticket item and very likely to cost more than a night on the town, it actually appears to be a relative bargain this year. Not only did prices fall approximately 1.1% in 2015 (versus a 15-year average gain of 1.6%), but prices for jewelry have fallen each year since 2012, following several years of above-average price increases. The continued fall in prices may present an opportunity for those who have been waiting for the right time to purchase a big gift. In fact, jewelry sales increased in 2015 versus 2014 as a Valentine s Day gift expense, according to the National Retail Federation s annual survey of consumers Valentine s Day spending plans. Consumers may already be acting on lower prices. TAKING A TRIP Our last gift idea again costs more on an absolute basis, but also looks reasonable relative to history. The travel category consists of prices for airline fare, hotel stays, and dining out. Here is one area where the decline in oil prices, the major driver of the slowdown in price increases for 2015, benefited consumers. Had it not been for constraints on jet fuel supply specifically, prices may have decreased further. The average cost of airline tickets fell nearly 5% in 2014, and another 3% in The only reason that the price of the gift basket increased was due to the cost of a hotel room, which increased at a rate of 1.6% last year, and the cost of dining out, which increased at a rate of 2.3%. CONCLUSION Taking a deeper look into one of the financial market s focal economic data releases, the CPI, can provide some useful information for consumers. The CPI measures price changes across many individual items, but the reality is that our actual inflation experience varies dramatically depending on what we consume. Just as markets can gain insight by looking at the individual items that make up the final inflation number (such as food or oil), we can also gain some valuable takeaways for the non-investing side of life by looking at the categories for the Valentine s Day gift shopper. A night at home remains the cheapest option for Valentine s Day this year, while a night on the town continues to see the largest annual price increases. A night out on the town may provide a good break from the norm, or 2016 may present an opportunity for going big with a trip or jewelry, with prices rising more slowly (or declining in the case of jewelry), compared with the overall level of inflation over the past year. 04

5 IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Because of their narrow focus, specialty sector investing, such as healthcare, financials, or energy, will be subject to greater volatility than investing more broadly across many sectors and companies. The National Retail Federation (NRF) is a retail trade association with members from all types of retail suppliers. Members include department stores, specialty, discount, catalog, internet and independent retailers, restaurant chains and grocers, as well as businesses that supply goods and services to retailers. The NRF forms an umbrella over more than 100 other state, national and international retail associations. This research material has been prepared by LPL Financial LLC. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity. Not FDIC or NCUA/NCUSIF Insured No Bank or Credit Union Guarantee May Lose Value Not Guaranteed by Any Government Agency Not a Bank/Credit Union Deposit RES Tracking # (Exp. 02/17) 05