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ZAIS Insights

The Inflation Trap

By Bernhard Eschweiler, PhD3 minute read

  • Disinflation progress since late 2022 has been impressive
  • But conditions have not sufficiently normalized for 2% inflation to persist
  • Inflation may drop to 2% temporarily but at risk to finish 2024 closer to 3%

Financial markets are confident that inflation in the US will reach the Fed’s target without significant costs to the economy. Interest rate markets price a return of inflation to the 2% level (see Chart 1) while risk markets rally without any fear of recession.1

The optimism has been boosted by the Fed’s shift in guidance. Based on the latest summary of economic projections, the FOMC expects inflation returning to target over 2024-25, alongside moderate growth, stable unemployment and nearly 200bps of rate cuts.2

Chart 1: Two-year inflation swap /  % a.r.
Source: JP Morgan3

In our view, such “soft-landing” is possible but not assured. Our main concern is that the disinflation progress could lose momentum amid firm consumer demand, a tight labor market and housing conditions, and the return of supply-chain pressures.

We think inflation could temporarily reach the 2% level but worry that it will rise again during the year, towards 3%. As a result, we think the Fed is right to be cautious and to look for more evidence that inflation is moving sustainably toward 2%.4

Impressive disinflation progress so far

Measured by the personal consumption expenditure deflator (PCE), the Fed’s official target for price stability5, headline inflation has dropped from a peak of 7.1% in June 2022 to 2.6% in December of last year.6 Looking at annualized 3-months-over-3-months (3m/3m) changes, the PCE deflator was up just 1.7% at the end of last year.7

Given the current dynamic, we think that headline PCE inflation has a chance of hitting the Fed’s 2% target at the end of the first quarter of this year. The question to us is whether 2% PCE inflation is sustainable.

Dissecting the moving parts

Chart 2 shows the main components of the annualized 3m/3m changes of the PCE deflator. The first round of disinflation in 2022 came from energy and core goods prices. This was followed by a moderation in food price increases.

Chart 2: PCE deflator decomposed / 
        % 3m/3m annualized
Source: U.S. Bureau of Economic Analysis and ZAIS’s own calculations.8

In 2023, the biggest disinflation push came from core services ex housing. Housing-related inflation has moderated a bit, but is still running high by past standards.

Table 1: PCE deflator in 2023 Q4
        Percent
Source: U.S. Bureau of Economic Analysis and ZAIS’s own calculations.9

Table 1 exhibits the quarterly changes of the main PCE components in the fourth quarter of last year and their weighted impact on the overall change of the PCE deflator.

The currently favorable dynamic of the PCE deflator rests on the deflationary impact from core goods prices, lower energy prices and the moderation in core services prices ex housing, which is by far the largest component of the PCE deflator.

A lot can happen to derail the disinflation progress. For example, rising geopolitical tensions could boost energy and food prices. In our view, sustainability of inflation around the Fed’s 2% target depends primarily on the normalization of labor market, housing and supply-chain conditions as well as overall consumer demand.

The labor market remains too tight …

Labor market conditions remain tight by past standards. The unemployment rate is near the lows of the last 50 years and below the Fed’s long-run estimate,10 employment growth is well above trend,11 the job opening rate – although off its peak – stays atop the unemployment rate12 and wage growth pressure is still very elevated (see Chart 3).

Chart 3: Wage growth tracker / 
        % oya 3mma
Source: Federal Reserve Bank of Atlanta13

We expect some moderation but absent a negative shock believe that labor market conditions will remain tight, keeping wage growth pressure elevated. This has implications for the demand side (solid income growth) as well as the supply side (cost pressure) and in our judgement means that a key source of underlying inflationary pressures will stay very alive in 2024.

… and consumer demand is firm

The accumulation of excess savings during COVID has allowed consumers to spend more and save less over the last two years (see Chart 4). The fact that the savings rate stayed low through the end of last year suggests to us that some savings buffer remains to support above-trend consumption through at least parts of this year. Furthermore, with the run-up to the election, fiscal policy is unlikely to turn unfriendly to consumers this year.

The positive backdrop for consumers is also visible in the recovery of consumer sentiment over the last year, especially as the disinflation progress has improved consumers’ real spending power.14

Summarizing, we think that, absent any shock, consumer spending is likely to stay firm for at least the first half of this year.

Chart 4: Personal saving rate / 
        % of disposable income
Source: U.S. Bureau of Economic Analysis15

Goods sector deflation likely to end

As pointed out before, a significant part of the disinflation progress was driven by core goods. In fact, falling core goods prices helped offset prevailing inflationary pressures in other sectors last year (see again Chart 2 and Table 1). We think this dynamic is likely to change this year.

Growth in goods consumption has moderated after the boom in 2020-21, but the level of goods demand remains high compared with the pre-Covid trend (see Chart 5).

On the other hand, supply-chain conditions, which were the main driver behind the disinflation progress, are no longer improving. Since the middle of last year, more manufacturers are reporting rising input prices, and the global supply-chain pressure index is moving higher, as well (see Chart 6). This partly reflects rising global transportation costs linked to the tensions in the Middle East.16

Chart 5: Real core goods consumption / 
        Index 2019-Q4=100
Source: U.S. Bureau of Economic Analysis and ZAIS’s own calculations.17

Chart 6: Manufacturing supply-chain conditions / Index centered around 50
Source: Federal Reserve Banks of New York and Institute for Supply Management18

An additional problem in the manufacturing sector is declining productivity (see Chart 7). This is not new news and has been a trend for more than 10 years, but becomes more pressing given our outlook of persistent tight labor market conditions. As a result, we view manufactures as more likely to look for opportunities to pass on unit labor costs pressures as long as demand conditions are favorable. All in all, we think a resurgence in goods price pressures as seen in 2021-22 is not in the offing, but we expect core goods prices to gradually rise this year unless demand suddenly weakens.

Chart 7: Manufacturing productivity /
        Index 2017=100
Source: US Bureau of Labor Statistics19

No relief from housing likely

Housing remains the most stubborn source of inflation so far. Housing accounts for 15% of the PCE deflator basket, yet its impact accounted for ro¬ughly half of the PCE deflator increase in the fourth quarter of last year (see Table 1, again). We are not prepared to enter the debate about the merits and faults of the calculation method of housing in the PCE deflator but we acknowledge research that suggests that the changes in new tenant rent inflation lead to changes in PCE housing inflation with a lag of about 12 months.20

Chart 8: Two measures of rent inflation /
          % 3m/3m annualized
Source: US Bureau of Economic Analysis and Zillow21

On that basis, Chart 8 suggests to us that the moderation in new-tenant rent inflation is largely reflected in the housing PCE deflator.

In fact, new-tenant rents reaccelerated since last August (see Chart 8 again). This is not yet a strong trend but we see this as a sign that the housing market remains tight, which is also evident in the reacceleration of house prices.22 We believe this tightness is largely structural23 and, while we do not expect another surge in rents and house prices as in 2021, we think housing inflation will remain well above the levels prior to COVID.

“Super-core” to the rescue?

Given our outlook of persistent elevated housing inflation and fading deflation from the core goods sector, all depends on a favorable development of core services inflation excluding housing, often called super-core inflation, which Fed Chairman Powell referred to as "may be the most important category for understanding the future evolution of core inflation."24

As seen earlier in Chart 2, the inflationary pressure from the super-core component on the PCE deflator has declined by more than half since the beginning of 2023 and the 3m/3m annualized change was running at 2.3% in the fourth quarter of last year (see Table 1, again). However, we caution against expectations that super-core PCE inflation will ease much further and stabilize at or below 2% for four reasons.

First, the recovery of demand in the super-core sector continues with real spending in the super-core sector growing 2.7% in the fourth quarter of last year versus the pre-Covid trend of 2.3%.25

Second, we agree with Fed Chair Powell that wages are the largest cost component in delivering services.26 Thus, given our view that labor market conditions will remain tight this year, we also expect wage cost pressures in super-core inflation to persist.

Third, the PCE deflator is partly based on non-market-based price estimates.27 The share of non-market-based price estimates is particularly high in the super-core component, accounting for more than a quarter of the total, including financial services as well as insurance for health-care, income-loss, life, motor vehicle and workers’ compensation.28

Chart 9: Super-core PCE deflator /
          % 3m/3m annualized
Source: US Bureau of Economic Analysis29

Chart 9 shows the 3m/3m annualized changes of the two price estimates in the super-core PCE deflator. Non-market-based prices have historically been more volatile, but increased at a similar pace on a trend basis as market-based prices before COVID.30

This co-movement has broken down at the start of COVID with market-based price estimates rising at a much faster pace than-non-market-based prices over the last two years (see Chart 9 again).

Trying to reconcile the gap between the two price estimates in detail exceeds the scope of this report. However, the market-based price estimate is sticky in our view and will only moderate if wage pressures ease significantly, which we do not anticipate.

On the other hand, we expect that the non-market-based estimate will adjust towards the more stable market-based price estimate over time. In particular, we do not expect the non-market-based super-core PCE deflator to keep falling as it did at the end of last year. If we are right, we think upcoming reports will show upward pressure on the overall super-core PCE deflator.

Our fourth caution relates to health-care services, which account for nearly 40% of the super-core PCE deflator.31 The large majority of health-care services in the PCE deflator is typically paid for by insurance providers, of which roughly 40% is Medicare and Medicaid and the rest is private insurance companies.32

Typically, the producer price index (PPI) for private health-care services tracks the health-care services PCE deflator well (see Chart 10). Since COVID, however, the health-care services PPI has outpaced the health-care services PCE deflator. This means to us that Medicare and Medicaid have been able to resist the rising health-care cost pressures to some degree.

Chart 10: Health-care services prices /
          % over a year ago
Source: US Bureau of Labor Statistics and US Bureau of Economic Analysis33

Efforts by Medicare and Medicaid to cap cost increases are understandable, but a full decoupling from the cost pressures in health-care services is unlikely in our view.

As a result, we expect PCE inflation in health-care services to remain elevated by past standards.

The sum of all parts

Table 2 shows our forecasts for PCE headline inflation and its main components for the fourth quarter of this year versus the fourth quarter of last year. As we outlined at the beginning, it is possible that headline PCE inflation moves temporarily lower, but we expect it to finish this year roughly at the same level where it was at the end of last year, which would be above the Fed’s projection of 2.4%.34

Table 2: Headline PCE inflation
          Percent
Source: U.S. Bureau of Economic Analysis and ZAIS’s own calculations and forecasts. 35

One obvious wild-card is energy prices, which could swing sharply in either direction and also move the overall inflation outcome significantly. However, excluding energy, our forecast does not change significantly (see Table 2, again).

As we argued at the start, sustainability of 2% inflation depends on the normalization of labor market, housing and supply-chain conditions as well as overall consumer demand. The tightening in supply-chain conditions may prove temporary and overall price stability may be achievable even if housing conditions remain tight. However, that means to us that much more cooling in labor-market and overall consumer demand conditions is needed to anchor super-core and headline inflation at 2%.

A different warning sign that underlying inflationary pressures persist comes from small businesses, which are an important part of the economy and heavily tied to the labor market.36 The Small Business Survey of the National Federation of Independent Businesses shows that employment conditions37 remain tight for the majority of firms and that more firms plan to raise prices again (see Chart 11).

Chart 11: Small firms planning to raise prices over the next three months / Net % share of firms
Source: National Federation of Independent Businesses38

Afterthought: And what about CPI?

Throughout this report we have focused on the PCE deflator because it is the Fed’s official target. However, that does not mean that we ignore the consumer price Index (CPI). The CPI varies from the PCE in several ways; most importantly, housing has a much higher weight in the CPI than in the PCE deflator.39

Still, thanks to the earlier publication of the monthly CPI by about two weeks before the monthly PCE deflator40 we view the CPI as an important leading indicator of both short-term inflation dynamics as well as underlying inflation trends. In this sense, the just released January 2024 CPI report serves as a warning, that inflationary pressures persist, especially as super-core services prices increased strongly.41

More Information

As always, we are available to discuss our views with you. Please contact your Client Relations representative at +1 732 978 9722 or zais.clientrelations@zaisgroup.com

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Endnotes

  1. The S&P500 has rallied 20% over the last three months from the end of October 2023 to the end of January 2024 setting a new historical high.
    https://www.spglobal.com/spdji/en/indices/equity/sp-500/#overview
  2. Board of Governors of the Federal Reserve System ; Federal Open Market Committee (FOMC); Summary of Economic Projections; December 13, 2023.
    https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20231213.pdf
  3. JPMorgan Markets, Data Query (https://markets.jpmorgan.com/#dataquery), retrieved Infl Swp US CPI 2Y Swap Rate.
  4. Board of Governors of the Federal Reserve System; Federal Reserve issues FOMC statement; January 31st, 2024.
    https://www.federalreserve.gov/newsevents/pressreleases/monetary20240131a.htm
  5. Board of Governors of the Federal Reserve System, Why does the Federal Reserve aim for inflation of 2 percent over the longer run?
    https://www.federalreserve.gov/faqs/economy_14400.htm#:~:text=The%20Federal%20Open%20Market%20Committee,maximum%20employment%20and%20price%20stability
  6. Headline inflation is measured as the % change of PCE deflator over a 12-months period.
    U.S. Bureau of Economic Analysis, Personal Consumption Expenditures: Chain-type Price Index [PCEPI], retrieved from FRED, Federal Reserve Bank of St. Louis; January 29, 2024.
    https://fred.stlouisfed.org/series/PCEPI
  7. We like to look at price changes over the last 3 months compared to the prior 3 months annualized as a measure of the short-term inflation trend as it excludes base-effects from the over-year-ago calculation. The calculation of the 3m/3m annualized changes is based on the same data source as in footnote 5.
  8. Calculations are based on the PCE price index components (Table 2.4.4U) and PCE spending components for 2017 (Table 2.4.5U) from US Bureau of Economic Analysis; Personal Income and Outlays, December 2023.
    https://www.bea.gov/news/2024/personal-income-and-outlays-december-2023
  9. Same as footnote 8.
  10. U.S. Bureau of Labor Statistics, Unemployment Rate [UNRATE], retrieved from FRED, Federal Reserve Bank of St. Louis; February 2, 2024.
    https://fred.stlouisfed.org/series/UNRATE
    Board of Governors of the Federal Reserve System; Federal Open Market Committee (FOMC); Summary of Economic Projections; December 13, 2023.
    https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20231213.pdf
  11. Employment increased over the last three months (January 2024 – November 2023) on average by 289,000 per months, well above the pre-COVID trend (2015-19) of 190,000 per month.
    U.S. Bureau of Labor Statistics, All Employees, Total Nonfarm [PAYEMS], retrieved from FRED, Federal Reserve Bank of St. Louis; February 2, 2024.
    https://fred.stlouisfed.org/series/PAYEMS
  12. U.S. Bureau of Labor Statistics, Job Openings: Total Nonfarm [JTSJOR], retrieved from FRED, Federal Reserve Bank of St. Louis; January 28, 2024.
    https://fred.stlouisfed.org/series/JTSJOR
  13. We prefer the Atlanta-Fed Wage Growth Tracker (WGT) over Average Hourly Earnings (AHE) reported by the Bureau of Labor Statistics. In our view, the WGT removes compositional distortions and provides a clearer picture of underlying wage trends in periods of large labor market swings.
    Federal Reserve Bank of Atlanta; Wage Growth Tracker; January 10, 2024.
    https://www.atlantafed.org/chcs/wage-growth-tracker
  14. University of Michigan; Survey of Consumers.
    http://www.sca.isr.umich.edu/
    The Conference Board; Consumer Confidence Survey.
    https://www.conference-board.org/topics/consumer-confidence
  15. U.S. Bureau of Economic Analysis, Personal Saving Rate [PSAVERT], retrieved from FRED, Federal Reserve Bank of St. Louis; January 29, 2024.
    https://fred.stlouisfed.org/series/PSAVERT
  16. The Drewry’s World Container Index has moved from less than $1,500 for a 40ft container last November to nearly $4,000 in late January.
    https://www.drewry.co.uk/supply-chain-advisors/supply-chain-expertise/world-container-index-assessed-by-drewry
  17. The pre-Covid trend is based on a linear regression of the natural logarithm of real core goods consumption and a linear time trend between 2015 and 2019.
    U.S. Bureau of Economic Analysis; Personal Income and Outlays, December 2023; Table 2.4.6U.
    https://www.bea.gov/news/2024/personal-income-and-outlays-december-2023
  18. Federal Reserve Bank of New York; Global Supply Chain Pressure Index (GSCPI).
    https://www.newyorkfed.org/research/policy/gscpi#/overview
    Institute for Supply Management; January 2024 Manufacturing ISM Report On Business (https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/pmi/january/). Time series retried from investing.com:
    https://www.investing.com/economic-calendar/ism-manufacturing-prices-174
  19. U.S. Bureau of Labor Statistics, Manufacturing Sector: Labor Productivity (Output per Hour) for All Workers [OPHMFG], retrieved from FRED, Federal Reserve Bank of St. Louis; February 1, 2024.
    https://fred.stlouisfed.org/series/OPHMFG
  20. For an overview of the research on the link between housing inflation and new tenant rents see: John O’Trakoun; Federal Reserve Bank of Richmond; When will a decline in asking rents be reflected in rent CPI? April 4th, 2023.
    https://www.richmondfed.org/research/national_economy/macro_minute/2023/mm_04_04_23
    The While House; Council of Economic Advisors; An Update on Housing Inflation in the Consumer Price index. April 27th, 2023.
    https://www.whitehouse.gov/cea/written-materials/2023/04/27/update-on-housing-inflation-in-cpi/
    Tyler Atkinson; Federal Reserve bank of Dallas; Rent inflation remains on track to slow over the coming year; June 20th, 2023.
    https://www.dallasfed.org/research/economics/2023/0620
  21. US Bureau of Economic Analysis; Personal Income and Outlays, December 2023; (Table 2.4.4U).
    https://www.bea.gov/news/2024/personal-income-and-outlays-december-2023
    Zillow; Housing Data; Zillow Observed Rent Index (ZORI).
    https://www.zillow.com/research/data/
  22. S&P Dow Jones Indices LLC, S&P CoreLogic Case-Shiller U.S. National Home Price Index [CSUSHPISA], retrieved from FRED, Federal Reserve Bank of St. Louis; January 30, 2024.
    https://fred.stlouisfed.org/series/CSUSHPISA
    Federal Housing Finance Agency; House Price Index; January 30th, 2024.
    https://www.fhfa.gov/DataTools/Downloads/Pages/House-Price-Index.aspx
  23. See also: ZAIS Insight, Housing Slump Supports Agency CRT Notes; November 2023.
    https://www.zaisgroup.com/housing-slump-supports-agency-crt-notes.html
  24. Fed Chair Jerome H. Powell; Inflation and the Labor Market; At the Hutchins Center on Fiscal and Monetary Policy, Brookings Institution, Washington, D.C.: November 20th, 2022.
    https://www.federalreserve.gov/newsevents/speech/powell20221130a.htm
  25. U.S. Bureau of Economic Analysis; Personal Income and Outlays, December 2023; Table 2.4.6U.
    https://www.bea.gov/news/2024/personal-income-and-outlays-december-2023
  26. See footnote 21.
  27. U.S. Bureau of Economic Analysis; What is the "market-based" PCE price index?
    https://www.bea.gov/help/faq/83
  28. US Bureau of Economic Analysis; Personal Income and Outlays, December 2023; (Table 2.4.5U).
    https://www.bea.gov/news/2024/personal-income-and-outlays-december-2023
  29. US Bureau of Economic Analysis; Personal Income and Outlays, December 2023; (Table 2.4.4U and Table 2.4.5U).
    https://www.bea.gov/news/2024/personal-income-and-outlays-december-2023
  30. Non-market-based prices in the super-core PCE deflator rose 2.2% annualized between 2015 and 2019 versus 1.9% for market-based prices.
    US Bureau of Economic Analysis; Personal Income and Outlays, December 2023; (Table 2.4.4U).
    https://www.bea.gov/news/2024/personal-income-and-outlays-december-2023
  31. Health-care services accounted for 38.6% of the super-core PCE deflator in the base year of 2017.
    US Bureau of Economic Analysis; Personal Income and Outlays, December 2023; (Table 2.4.5U).
    https://www.bea.gov/news/2024/personal-income-and-outlays-december-2023
  32. Diane Alexander; The Federal Reserve Bank of Chicago; The recent rise in health care inflation; Chicago Fed Letter, No. 407, 2018.
    https://www.chicagofed.org/publications/chicago-fed-letter/2018/407
  33. U.S. Bureau of Labor Statistics, Producer Price Index by Commodity: Health Care Services [WPU51], retrieved from FRED, Federal Reserve Bank of St. Louis; January 30, 2024.
    https://fred.stlouisfed.org/series/WPU51
    US Bureau of Economic Analysis; Personal Income and Outlays, December 2023; (Table 2.4.4U).
    https://www.bea.gov/news/2024/personal-income-and-outlays-december-2023
  34. Federal Open Market Committee (FOMC); Summary of Economic Projections; December 13, 2023.
    https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20231213.pdf
  35. Calculations are based on the PCE price index components (Table 2.4.4U) and PCE spending components for 2017 (Table 2.4.5U) from US Bureau of Economic Analysis; Personal Income and Outlays, December 2023.
    https://www.bea.gov/news/2024/personal-income-and-outlays-december-2023
  36. US Chamber of Commerce; The State of Small Business Now. April 10th, 2023.
    "Small businesses are generally defined by the U.S. Small Business Association (SBA) as independent businesses having fewer than 500 employees. Based on SBA's definition, there are 33.2 million small businesses in America, which account for 99.9% of all U.S. firms. Small businesses are credited with just under two-thirds (63%) of the new jobs created from 1995 to 2021 or 17.3 million new jobs. Small businesses represent 97.3% of all exporters and 32.6% of known export value ($413.3 billion). They also employ almost half (46%) of America's private sector workforce and represent 43.5% of gross domestic product."
    https://www.uschamber.com/small-business/state-of-small-business-now
  37. National Federation of Independent Businesses; Small Business Economic Trends; January 2024; Pages 10-12.
    https://strgnfibcom.blob.core.windows.net/nfibcom/SBET-Jan-2024.pdf
  38. National Federation of Independent Businesses; Small Business Economic Trends; January 2024; Page 9.
    https://strgnfibcom.blob.core.windows.net/nfibcom/SBET-Jan-2024.pdf
  39. Clinton P. McCully, Brian C. Moyer, and Kenneth J. Stewart; Bureau of Economic Analysis and Bureau of Labor Statistics; A Reconciliation between the Consumer Price Index and the Personal Consumption Expenditures Price Index; December 2007.
    https://www.bea.gov/sites/default/files/papers/P2007-4.pdf
    Wesley Janson, Randal J. Verbrugge, Carola Conces Binder; Federal Reserve Bank of Cleveland; The CPI-PCEPI Inflation Differential: Causes and prospects; 03.02.2020.
    https://www.clevelandfed.org/publications/economic-commentary/2020/ec-202006-cpi-pcepi-inflation-differential US Bureau of Labor Statistics; Economic News Release; Table 2. Consumer Price Index for All Urban Consumers (CPI-U): U.S. city average, by detailed expenditure category, December 2023
    https://www.bls.gov/news.release/cpi.t02.htm#cpipress2.f.13
  40. https://www.bls.gov/schedule/news_release/cpi.htm
    https://www.bea.gov/data/personal-consumption-expenditures-price-index
  41. US Bureau of Labor Statistics; Consumer Price Index Summary; February 13, 2024.
    https://www.bls.gov/news.release/cpi.nr0.htm

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Forward Looking Statements

These materials may contain statements that are not purely historical in nature but are “forward-looking statements”. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “should” and “would” or the negative of these terms or other comparable terminology. These forward-looking statements include, among other things, projections, forecasts, estimates or hypothetical calculations with respect to income, yield or return, future performance targets, sample or pro forma portfolio structures or portfolio composition, scenario analysis, specific investment strategies or proposed or pro forma levels of diversification or sector investment. These forward-looking statements are based upon certain assumptions, some of which are described herein. Prospective investors are cautioned not to place undue reliance on such statements. No representation is made by ZAIS as to the accuracy, validity or relevance of any such forward-looking statement and the recipient agrees it is solely responsible for gathering its own information and undertaking its own projections, forecasts, estimates and hypothetical calculations. Actual events are difficult to predict, are beyond ZAIS’s control, and may substantially differ from those assumed. All forward-looking statements included herein are based on information available on the date hereof or such date specified and ZAIS does not assume any duty to update any forward-looking statement contained herein. Some important factors which could cause actual results to differ materially from those in any forward-looking statements include, among others, the actual composition of the investment portfolio, any defaults to the investments, the timing of any defaults and subsequent recoveries, changes in interest rates, changes in currency rates and any weakening of the specific obligations included in the portfolio. Accordingly, there can be no assurance that estimated returns or projections can be realized, that forward-looking statements will materialize or that actual returns or results will not be materially lower or higher than those presented. The value of any investment, and the income from it, may fall as well as rise. Accordingly, there can be no assurances that an investor will receive back all or any of the original capital invested. Further, the eligible investments may be leveraged and the portfolio of eligible investments may lack diversification thereby increasing the risk of loss.

ZAIS Group (UK) Limited

ZAIS Group (UK) Limited is a company registered in England with number 08908933 and whose registered office is c/o Dixon Wilson, 22 Chancery Lane, London WC2A 1LS, United Kingdom. ZAIS Group (UK) Limited is an appointed representative of Infinity Asset Management LLP, which is authorized and regulated by the Financial Conduct Authority in the United Kingdom. ZAIS Group (UK) Limited’s status as an appointed representative of Infinity Asset Management LLP does not imply a certain level of skill or training. Investors will not benefit from the rules and regulations made under the Financial Services and Markets Act 2000 for the protection of investors, nor from the Financial Services Compensation Scheme in the United Kingdom. Nothing herein excludes any liability which ZAIS is not permitted to exclude by applicable law.

Regulatory Registrations and Authorizations

ZAIS Group, LLC’s registrations with the Securities and Exchange Commission (the “SEC”) and the Commodity Futures Trading Commission (the “CFTC”), and ZAIS Group (UK) Limited’s status as an appointed representative of Infinity Asset Management LLP (which is authorized by the United Kingdom’s Financial Conduct Authority (“FCA”), does not imply a certain level of skill or training.