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Inflation Is Going to Rise; Here's How to Protect Youself
Something ugly is set to make a comeback: inflation.
It won't be like that seen in the 1970s when lava lamps and polyester suits only added to the hideous economic malaise. This time it will be subdued in comparison, but still higher than it has been in recent years.
The consumer price index, which is a measure of consumer inflation, has remained less than 2 percent for most of the last four years, according to government figures. But that period of historically low level of price rises is set to end soon. Here's why and what you can do to protect the purchasing power of your assets.
Commodity prices. "Inflation is rising – the easiest way to recognize it is in the price of commodities," says David Ranson, director of research at HCWE & Co. Commodities prices are rising. The price of crude oil hit a recent low of $26 a barrel in February before rebounding the mid-$40s. Similarly, the Thomson Reuters/CoreCommodity CRB Commodity index, which tracks a broad basket of commodity prices, hit a low of 155 in February before rebounding to 183 lately. "When commodities are rising you get strong inflation," Ranson says. "It won't show up very quickly but there is a lot of data, based on history, to verify that it will show up." It might not be apparent, but the price of gasoline goes into a lot of things we consume, such as bread, which needs to be trucked from where it is baked to where it is sold. So higher gasoline prices, which moves up and down with oil prices, will mean higher food costs.
Bond prices. The market for fixed-income securities gives us some clues as well. Government bonds have sold off following the general election in anticipation of higher growth in the U.S. under a Trump administration. Yields move inversely with bond prices. The 10-year Treasury note offered an interest rate of 2.12 percent a few days after the election, versus 1.78 before the election.
"Potentially, investors see a significant fiscal boost, which could be very, very good," says Sinead Colton, head of investment strategy at Mellon Capital in San Francisco. "The other thing that is playing in is higher growth and how that feeds through to inflation."
Inflation is low, but highly variable. Another important factor is that the headline inflation rate will belie bigger moves in individual components of the consumer price index. "Thanks to a cyclical upturn in non-tradable services inflation, year-on-year core CPI services inflation – boosted by shelter and health care inflation – is hovering around an eight-year high," says Lakshman Achuthan, co-founder of the New York-based Economic Cycle Research Institute. In simpler terms, health care insurance premiums are jumping, as are rents, and that's boosting the overall price level. On the other hand, gadgets and consumer technology items are sometimes falling in price.
"Yet they (the falls in some prices and rises in others) don't offset one another, any more than having one foot in ice water and the other in scalding water feels comfortable, on average," Achuthan says. That image of the boiling water and the ice gives some idea of the likely financial discomfort coming. You need a place to live, so you can't do much about rising rents. Plus, the law says you need to purchase health insurance or else pay a penalty.
It's likely those additional costs will take a bite out of discretionary spending on things such as dining outside the home. It may not be the right time to invest in restaurant stocks.
Economic Cycle Research Institute, November 15th, 2016
