CPI Might Soften, but TIPS ETFs Still Hold Allure | ETF Trends

Economists expect that the May reading of the Consumer Price Index (CPI), due out on June 13, will show a 4.2% year-over-year increase.

That’s far better than the 8.6% surge seen in May 2022 and an improvement from the 4.9% increase reported in April. Investors will watch the report closely, per usual, particularly because the Federal Reserve meets on Wednesday.

Sure, a case can be made that the CPI is improving, but that doesn’t mean the case for Treasury Inflation-Protected Securities (TIPS) and exchange traded funds such as the Vanguard Short-Term Inflation-Protected Securities ETF (VTIP) is dead. The opposite is true because some experts believe that producer prices, as measured by the Producer Price Index (PPI), are likely to remain elevated.

VTIP Case Alive and Well

After it and its rivals endured a disappointing showing in 2022, VTIP is higher by 1.69% year-to-date while sporting a tempting yield of 5.76%. Investors who think they’ve missed out on the “easy money” in the ETF may want to think twice.

“The Fed has been battling to get inflation down closer to its target of 2%, as measured by the Personal Consumption Expenditures Price Index. As of the April CPI report, inflation is down to 4.9% from its year-ago levels. That’s well below the 9.0% peak we saw in 2022, but the fight is far from over,” according to Morningstar research.

When considering VTIP, it’s also important to remember the details when it comes to CPI reports. Yes, it’s encouraging that food prices likely moderated a bit last month. However, economists expect that healthcare and real estate prices, among others, are still high. In other words, there are some relics of the early coronavirus pandemic lingering today, and they’re affecting inflation.

“Distortions in the labor market, exacerbated by the effects of the coronavirus pandemic on the composition and habits of the workforce, are affected by factors beyond the Fed’s control,” added Morningstar.

Further supporting the case for VTIP is a tight labor market. Many participants have dropped out of the jobs market altogether, making it harder for employers to attract talent. The primary way of doing that is to boost wages, which can have inflationary effects.

“These distortions are contributing to the hotter labor market, and the recent inflationary surge has worked its way into expectations. Landlords expect higher maintenance costs and demand higher rent, and employees are spending more and expecting higher salaries to make up the difference,” José Torres, senior economist at Interactive Brokers, told Morningstar.

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