Investors are pricing the markets and exchange traded funds (ETFs) in anticipation of rising inflationary pressures. However, the current round of inflation may be affecting the country quite differently than we are used to. Inflation isn’t playing favorites this time and is affecting the U.S. as a whole rather than specific urban areas.
Nicholas Colas, ConvergEx Group chief market strategist, notes incremental inflation is moving from the big cities to smaller metro areas. Large cities, like New York and Los Angeles, where inflation has historically run higher than the rest of the country, are not experiencing the jump in inflation that smaller metro areas are seeing.
For instance, the average inflation of the five largest U.S. cities increased by 27% during 2000 to 2008, whereas the national average was 25.5% and 23.7% for the five smallest cities.
Currently, the five smallest cities are experiencing a 2.3% rise in inflation over the last two years, as compared to a 0.5% increase in the five largest cities and a 1.1% national average.
Colas opines that the current round of broad price increases in energy and food have influenced every part of the country quite evenly, and the inflation caused by the real estate boom in the last decade was more of a bi-coastal occurrence.
“The mechanism for this shift seems obvious — the nature of how inflation moves through the economy has fundamentally changed since 2008,” the strategist wrote. “It used to be transmitted by real estate prices, which ballooned most egregiously in large metro markets and their immediate suburbs. That made everything more expensive since business owners had to offset higher rents with increased prices.”
Now the leading edge of inflation “has moved to a population base with fewer resources (lower incomes) to allow it to absorb the hit of higher prices,” Colas said.
One of the tools investors can use to fight inflation are Treasury Inflation-Protected Securities ETFs. [Hedge Against Rising Inflation with TIPS ETFs.]
Some TIPS ETFs include:
- iShares Barclays TIPS (NYSEArca: TIP)
- iShares Barclays 0-5 Year TIPS (NYSEArca: STIP)
- PIMCO 1-5 Year U.S. TIPS (NYSEArca: STPZ)
- PIMCO 15+ Year U.S. TIPS Index Fund (NYSEArca: LTPZ)
- PIMCO Broad U.S. TIPS Index Fund (NYSEArca: TIPZ)
- Schwab U.S. TIPS (NYSEArca: SCHP)
- SPDR Barclays Capital TIPS ETF (NYSEArca: IPE)
iShares Barclays TIPS
For more information on inflation, visit our inflation category.
Max Chen contributed to this article.
For full disclosure, Tom Lydon’s clients own TIP.