With the economy picking up and the markets chugging along, exchange traded fund investors should begin to think about how inflation could affect their portfolios.
“The big risk that is not being factored into stocks and bonds is inflation. You can’t have central banks around the world printing money the way they are and not have the risk of inflation,” Charles Bobrinskoy, vice chairman at Ariel Investments, said in a CNBC article. “It’s not being built into stock prices or bond prices, so we think you got to protect yourself and your portfolio against inflation going forward.”
The price index for personal consumption expenditures rose 0.2% in May from April, the Wall Street Journal reports. The annual inflation rate was 1.8%, a little short of the Federal Reserve’s 2% target. Core prices, which exclude food and energy costs, rose 0.2% from April and 1.5% year-over-year. [Indexology: Rising Inflation? That’s For Time To Decide]
Dean Maki, chief U.S. economist at Barclays Capital, expects inflation to make a “steady move higher” and surpass the Fed’s 2% target by the end of the year. Consequently, Maki believes the Fed will hike rates mid-2015.
Nicholas Colas, managing director and chief market strategist at brokerage ConvergEx Group, argues that it makes “a ton of sense to e cautious” after the bond rally this year despite benchmark rates already near zero. However, he is still waiting on wage inflation to pick up before worrying about inflationary pressures.
Nevertheless, the analysts agree that the economy is slowly improving and markets could continue to strengthen.