Turn on any financial newscast or open any newspaper and you’ll surely find a debate on the threat of inflation. Inflation is of particular importance to investors because it erodes purchasing power and historically has affected the returns of stocks and bonds.

In this blog series, I will provide answers to 5 key questions that are pervading everyone’s mind.

1. Is Inflation Accelerating?

Despite the headlines, actual inflation has remained muted. The U.S. Consumer Price Index (CPI) actually declined 1.2% YOY, representing the biggest drop in prices since 1950.

However, there is usually a lag before inflationary pressures tend to show up after the deluge of government bailouts and trillion dollar deficits. CPI generally offers little information about where inflation may be heading. Looking at a group of more forward-looking, market based inflation indicators can sometimes clarify. Here are a few:

  • Commodities – such as gold and crude oil, have staged a broad-based rally from their lows in 2008.
  • Long-term Treasury Bond Yields – nearly doubled in 2009.
  • Implied inflation rate in TIPS – climbing, showing a big increase from the 5 year deflation predicted in 2008.

However, at these levels, the indicators do not appear to provide any support for spiking inflation rates (i.e. hyper-inflation). Crude oil is still 50% lower than it was last year, Treasury yields are near their lowest ever, and TIPS prices project only 1.4% inflation over the next 5 years.

BOTTOMLINE ANSWER: Yes, there are signs that inflation is accelerating, but not at an unusually high rate.


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Source: MARE group