Recent data on the state of our economy doesn’t look all that cheery. Despite copious aid provided by the Fed, inflation has not spiked. It wouldn’t hurt to start considering ways to count deflation’s negative effects by using exchange traded funds (ETFs).
The core Consumer Price Index (CPI), excluding food and energy, only inched 0.6% in October year-over-year, the smallest 12-month increase since the index’s inception in 1957, reports Agustino Fontevecchia for Forbes. At best, we might be seeing stagflation – a period of no growth. Worst-case, though, these numbers could be a deflation harbinger. [ETF Strategies to Cope With Deflation.]
Clothing and shelter experienced a 1.2% and 0.3%, respectively, drop year-over-year. Core CPI, was flat as compared to September, with prices on used cars and trucks falling 0.9%, clothing dropped 0.3% and tobacco was down 0.3%. Energy and food prices helped push the index up 0.2% from September and up 1.2% year-over-year. [ETFs Could Be Facing Deflation; How to Cope.]
Deflation is ugly: prices drop, lower prices reduce business profits, managers cut back on employees, consumers buy less and lower demand brings in another round of lower prices. Exacerbating the situation, frugal consumers often wait for prices to decline even more.
There are some ways to combat this:
Cash. The greatest asset to own during a deflationary period would be cash, because your purchasing power vastly increases during deflation.
Short-Term Bonds. U.S. Treasury debt often rises in price when deflation is present because investors shun risk in favor of safety. Consider Treasury bond ETFs such as iShares Barclays 1-3 Year Treasury (NYSEArca: SHY) or PIMCO 1-3 Year U.S. Treasury (NYSEArca: TUZ).
Short-Term Strategies. Deflation often dings the market as its pernicious contagion effect carries over into the corporate sector and chips away at profits. Inverse ETFs such as ProShares Short S&P 500 (NYSEArca: SH) or Direxion Daily Large Cap Bear 3x Shares (NYSEArca: BGZ) can help you capitalize on the hopefully brief downtrend.
Dividends. Dividends can help keep income coming and your portfolio afloat. Dividend ETFs like WisdomTree Dividend Top 100 (NYSEArca: DTN) or PowerShares Dividend Achievers (NYSEArca: PEY) can give the exposure and protection you may be seeking.
For more information on consumer prices, visit our inflation category.
Max Chen contributed to this article.