While U.S. inflation remains at historic lows,
has ticked up recently
, leaving many investors fearing that it's time to prepare
portfolios for rising prices.
Some fears are primal. For investors, particularly those old
enough to remember "The Great Inflation" of the 1970s and early
1980s, inflation is one of them. This fear is reinforced by the
widespread perception among market watchers that six years of
extraordinary monetary stimulus will inevitably lead to
As I've expressed in the past, given the United States'
unresolved fiscal issues, still excessive non-financial debt, and
uncertain path toward monetary normalization,
fearing inflation isn't irrational
. However, as of today, it may still be premature.
Recent readings have shown that inflation has stabilized,
which is a good thing, but signs of an imminent acceleration in
inflation are still scant. In other words, it's probably too
early to restructure a portfolio
around a big shift in the inflation outlook
. Consider these four facts.
Consumer inflation is still historically low.
While it's true that inflation has risen from last year's lows -
the consumer price index (
has doubled over the past 7 months - the rise needs to be placed
in context. Both the CPI and
producer price index (PPI)
have only reverted back to their three-year average.
Other measures of inflation look more benign.
is at 1.8%, its post-recession average. More importantly, the
core personal consumption expenditure (core
), the Fed's preferred measure of inflation, is at 1.5%, still
well below the Fed's target of 2%.
Inflation expectations remain stable.
Both the University of Michigan's 1- and 5-year measures of
inflation expectations are at, or below, the middle of their
respective 3-year range. Ten-year inflation expectations from the
Treasury Inflation-Protected Securities (
) market remain stable at roughly 2.25%.
Wage inflation remains subdued.
Much of the recent anxiety about inflation has focused on two
areas: housing and the labor market. On the former, there is some
evidence of housing inflation. The Owner Equivalent Rent (the
Labor Department's measure of housing inflation) is at 2.6%, the
highest level since the summer of 2008. I believe this reflects a
rebound in housing and a growing willingness to rent. However,
evidence of wage inflation is more difficult to come by. While
most measures of wages have accelerated from last year's lows,
they remain subdued. Hourly wages are rising at 2%
year-over-year, consistent with the subdued pace we've witnessed
since the recession ended. A more complete measure of wages - the
Employment Cost Index (ECI)
- is growing at 1.8% year-over-year, right in the middle of its
Without more tangible evidence of a pickup in wages, I'd avoid
restructuring a portfolio around expectations of imminent
inflation. That said, over the long term, investors should be
concerned about preserving purchasing power. Unfortunately, some
of the traditional inflation hedges are expensive, despite the
dearth of imminent inflation signs.
For example, TIPS are barely providing a positive real yield,
even before taking taxes into account. And as I recently
discussed, while gold and silver both have a place in a
portfolio, the potential for rising real-rates calls into
question whether now is the right time to add to
precious metal positions
Instead, I'd look to equities to provide
long-term hedge against an eventual pickup in inflation
. In particular,
continue to like energy stocks
. Despite outperforming year-to-date, the energy sector is one of
the few segments of the market that still appears inexpensive.
Finally, the sector has an additional benefit: In the past,
energy stocks have been one of the better performers when
inflation is rising.
Sources: BlackRock, Bloomberg, Citi Investment Research
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