As the U.S. government has resorted to excessive spending measures to keep the economy from completely crumbling, many investors suggest that inflation is inevitable and is likely to prevail in the near future.
Current economic data suggest that inflation is relatively tame, but prices are on the rise. In April, the Consumer Price Index, also known as the CPI, rose by 3.2 percent from a year earlier marking the fourth straight month of rising prices. Furthermore, these increases in prices had already emerged in the retail sector as rising prices of cotton, wheat, sugar, crude oil and other raw materials have forced companies like Starbucks (SBUX), McDonalds (MCD) and Levi Strauss to raise prices and pass the impact through to the consumer.
Another indicator that inflation is likely to prevail is the recent jump in the breakeven rate of five-year Treasury Inflation Protected Securities (TIPs), which are flirting with three year highs. The breakeven rate is the yield difference between TIPS and comparable maturity Treasuries and a good measure of the outlook for consumer prices over the life of the securities, in this case five years. As this rate increases, the likelihood of rising prices increases.
Lastly, the general perception of inflation expectations appears to be rising at the Federal Reserve. In fact, according to Caroline Salas and Scott Lanman of Bloomberg, expectations for annual consumer price gains have increased by more than 40% since the Fed began its second round of asset purchase in November. Despite this perception, the Fed continues to implement its stimulus policy-making by keeping the short-term interest rate at or near zero, which could also add fuel to the inflation fire.
At the end of the day, although inflation is not prevailing, signs are starting to emerge. Some ways to protect against inflation include:
- iShares Barclays TIPS Bond Fund (TIP), which is one of the most popular way to hedge against inflation. TIP is designed to generate a yield which adjusts to the CPI, meaning that as CPI rises, TIP’s yield rises and vice versa
- IndexIQ CPI Inflation Hedged ETF (CPI), which aims to track an Index that seeks to generate a rate of return that is above inflation which is measured by the consumer price index
- PowerShares DB Agriculture Fund (DBA) holds futures contracts in food based commodities such as corn, wheat, sugar and soybeans, which could witness price appreciation as inflation looms.
- US Oil Fund (USO) which is a play on crude oil futures contracts. Historically speaking, crude oil appreciates in value during times of inflation, which would enable USO to reap the benefits.
- SPDR Gold Shares (GLD)- traditionally gold has been the go-to investment to hedge against inflation and will likely to continue to witness appreciation in inflationary times.
Disclosure: No Positions