While U.S. inflation remains at historic lows, it 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 inflation.
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 (CPI) 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. Core PPI is at 1.8%, its post-recession average. More importantly, the core personal consumption expenditure (core PCE), 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 (TIPS) market remain stable at roughly 2.25%.