Warren Buffett Warns of 'Substantial Inflation'

Legendary investor and Berkshire Hathaway CEO/chairman Warren Buffett sees “substantial inflation” on the horizon, boosting the case for assets like the Vanguard Short-Term Inflation-Protected Securities Index Fund ETF Shares (VTIP).

Gold, commodities, and Treasury inflation-protected securities (TIPS) are just a few ways to hedge against the rising tide of inflation. An ETF like VTIP can help investors hedge in this manner without having to purchase individual hedging components.

“We are seeing very substantial inflation,” Buffett said at the conglomerate’s annual shareholder meeting this past weekend. “It’s very interesting. We are raising prices. People are raising prices to us and it’s being accepted.”

“We’ve got nine homebuilders in addition to our manufacture housing and operation, which is the largest in the country. So we really do a lot of housing. The costs are just up, up, up. Steel costs, you know, just every day they’re going up,” the legendary investor added.

VTIP seeks to track the performance of the Bloomberg Barclays U.S. Treasury Inflation-Protected Securities (TIPS) 0-5 Year Index. The index is a market-capitalization-weighted index that includes all inflation-protected public obligations issued by the U.S. Treasury with remaining maturities of less than 5 years.

The manager attempts to replicate the target index by investing all, or substantially all, of its assets in the securities that make up the index, holding each security in approximately the same proportion as its weighting in the index.

VTIP Chart

A Short-Term Solution?

Yields have been on the rise, which is helping to spark inflation fears among investors. Since bond prices move conversely with yields, a short-term solution could be ideal in limiting interest rate risk.

As mentioned on the Vanguard website, VTIP is:

  • Designed to generate returns more closely correlated with realized inflation over the near-term, and to offer investors the potential for less volatility of returns relative to a longer-duration TIPS fund.
  • Expected to have less real interest rate risk, but also lower total returns relative to a longer-duration TIPS fund.
  • Investing in bonds backed by the full faith and credit of the federal government and whose principal is adjusted semiannually based on inflation.
  • An option to provide protection from inflationary surprises or ”unexpected inflation.”

For more news, information, and strategy, visit the Fixed Income Channel.