Most economists agree that inflation is unusually low, and probably will stay that way for some time to come.
If you're an investment adviser, you've probably had The Inflation Talk, which goes roughly like this:
You: “I'm using 2% for our inflation estimate...”
Client: “You're a moron.”
For baby boomers in particular, inflation is a touchy subject. After all, they lived through the biggest burst of inflation since the 1920s and are constantly haunted by fear of inflation. You might be able to soothe their fears — and make them some money — by investing in Treasury Inflation-Protected Securities, or TIPS.
Most economists agree that inflation is unusually low, and probably will stay that way for some time to come. The government's Consumer Price Index gained 1% over the 12 months that ended in February. The members of the National Association of Business Economists estimate inflation will run at a 1% rate for all of 2016.
The government bond market seems to agree. The 10-year Treasury note yields less than 2%, a level that doesn't indicate fears of price hikes any time in the near future. Yet mutual funds that invest in TIPS have been one of the top performers among fixed-income funds. The average TIPS fund has gained 3.11% this year versus 2.89% for high-yield bond funds and 2.13% for intermediate-term government bond funds, according to Morningstar. What gives?
THE BEGINNING
Let's start at the beginning. The current yield on 10-year TIPS implies a 1.56% average inflation rate for the next decade, said Maura Murphy, co-portfolio manager of the Loomis Sayles Inflation Protected Securities and Multi-Asset Income funds. That's not much.
But it's well above the 1.21% break-even rate in February, which was the lowest since March 2009. So you could argue that February's deflation jitters simply pushed TIPS too low.
You could also argue that TIPS have room to run. “It's probably both things,” Ms. Murphy said. What could push TIPS higher?
• Energy. TIPS rise with the headline Consumer Price Index, which includes energy. If oil prices rise — or even if they remain firm — TIPS should benefit.
CARE AND SHELTER PRICES UP
•Health care and shelter. One reason clients think the current inflation rate is a myth is because of rising prices for health care and shelter. Inflation for both has increased 3.9% in the past 12 months.
•Fed policy. Bond markets worried the Fed was raising short-term rates too aggressively, which could slow the economy and, if pushed too hard, press it into deflation. “Now they have set the stage for letting inflation run a little,” Ms. Murphy said.
•Yield. The real yield of TIPS is now about 0.2%. On the other hand, inflation-adjusted bonds in the U.K. have a 1% yield, and many other global inflation-adjusted bonds are negative, too. Low yields elsewhere make U.S. TIPS look attractive.
Finally, there's the matter of wages. You can't have a wage-price spiral without a rise in wages, and since the financial crisis, wrestling a raise out of an employer has been hard. But average hourly wages are up 2.25%.
More importantly, there have been rising demands for higher wages as unemployment falls.
The National Employment Law Project says that nearly 17 million workers have received wage in-creases since 2012, largely because of the movement to raise the minimum wage. Major work stoppages, such as strikes, idled 47,000 workers in 2015, vs. 34,000 in 2014.
VERIZON STRIKE
Last Wednesday, 36,000 Verizon workers went on strike, the largest U.S. strike since 2011. In Minneapolis, city janitors went on a one-day strike in January, their first in decades. A second strike was averted with an agreement to push hourly wages to $15.
Clearly, no one is getting rich here. On the other hand, companies are struggling to find qualified workers, which may signal an inflation increase ahead.
“There's room for inflation expectations to move back to average,” Ms. Murphy said. And that, of course, would benefit TIPS.
