A slew of popular measures of inflation has been climbing sharply in recent times. The personal consumption expenditures (PCE) index, the Fed's preferred gauge of measuring inflation, has ticked up in January. Along with it, core consumer prices went above the Federal Reserve's target of 2% last month. Core-CPI is also one of the most popular measurements of inflation as it excludes the volatile food and energy prices.
Moreover, as oil prices continue to strengthen and the job market looks solid, it is expected that the inflation rate may jump further. In this scenario, it will be prudent to invest in inflation-protected mutual funds for better returns.
Inflation Rate Heating Up
Six months ago, inflation was barely rising. During that period, it gained around 0.2% on a year-over-year basis. But things have dramatically changed now. The PCE index, in the 12 months through January, advanced 1.3%, the highest increase since Oct. 2014. According to the Fed, the PCE index is the "most consistent over the longer run with the US Federal Reserve's statutory mandate." Moreover, the core-PCE index that excludes food and energy prices also rose 1.7% in the 12 months through January, the largest increase since July 2014.
Additionally, core CPI increased 2.3% in February on a year-over-year basis, its biggest increase since May 2012. Core CPI gained 0.3% in February, higher than the consensus estimate of 0.2%. Separately, medical care and prescription drug prices rose 0.5% and 0.9%, respectively, last month. Costs of apparel also rose 1.6%, the largest gain since Feb. 2009. Prices for new motor vehicles, used cars and trucks too moved north.
Oil Prices Gain
It seems a rebound in oil prices in mid-February from its record lows turned out to be one of the primary reasons that pushed inflation higher. U.S. crude price posted a 7% weekly gain on Friday, a day after it settled above $40 a barrel for the first time this year.
Price of oil and inflation has a cause and effect relationship. Oil is used in necessary activities such as fueling transportation and heating homes. So, if its costs rise, so does the cost of the end products. Oil is also used to make plastics, so if its cost rises then the producer will increase the cost of the plastic, which the consumer will have to bear.
Jobs Data Solid
Meanwhile, a healthy labor market is also threatening to propel inflation. The U.S. economy added 242,000 jobs in February, handily beating the consensus estimate of 194,000, according to the Bureau of Labor Statistics. The tally was also considerably higher than January's upwardly revised job number of 172,000.
The unemployment rate in February also remained unchanged at 4.9%. Additionally, U6, the most rigorous metric of unemployment in the U.S. economy, declined to 9.7%. This measure takes into account individuals who are not searching for employment or those who are working part-time since they cannot secure full-time employment. Additionally, hourly wages came in at $24.80 per hour in February, which increased 2.2% on a yearly basis.
People having more jobs along with higher wages generally increase their spending on discretionary items. So, demand for such products will help stoke inflation. Consumer spending levels had already increased at the fastest pace in eight months this January.
5 Inflation-Protected Mutual Funds to Buy Now
Fed Chair Janet Yellen said "given that the economy is now close to our maximum employment objective, hopefully inflation is moving up." And we believe that the rise in oil prices will surely help inflation to move up in the near future.
The so-called "break-even rates" that give an approximate estimate of inflation derived from comparing the yields of conventional and inflation-proof Treasuries have also increased this month. The 10-year break-even rate moved up to 1.62% on Friday, the highest since December. The 5-year break-even rate also ticked up to 1.52%, the highest since last summer. The 2-year break-even rate rose to its highest since July 2014 to 1.64%.
Additionally, the latest consumer survey by the University of Michigan released on Friday showed that expectations for both one-year and longer-term inflation increased from 2.5% last month to 2.7% this month.
With inflation worries mounting, we have selected five mutual funds that will protect investors from a rise in prices of essential goods and commodities. Funds have been selected over stocks, since funds reduce transaction costs for investors and also diversify their portfolio without the numerous commission charges that stocks need to bear.
Further, these funds boast a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy), have positive year-to-date and 5-year annualized returns, minimum initial investments within $5000 and carry a low expense ratio.
JPMorgan Inflation Managed Bond A (MUTF:JIMAX) seeks to maximize inflation-protected total return. JIMAX normally invests a major portion of its "Assets" in bonds. JIMAX's year-to-date and 5-year annualized returns are 1.4% and 1.2%, respectively. JIMAX carries a Zacks Mutual Fund Rank #1 and the annual expense ratio of 0.75% is lower than the category average of 0.76%.
AI US Inflation-Protected A (MUTF:FNIHX) invests a large portion of its assets in inflation-indexed securities that are denominated in U.S. dollars. FNIHX's year-to-date and 5-year annualized returns are 2.8% and 1.9%, respectively. FNIHX carries a Zacks Mutual Fund Rank #2 and the annual expense ratio of 0.72% is lower than the category average of 0.76%.
American Century Inflation Adjusted Bond A (MUTF:AIAVX) invests a major portion of its assets in inflation-adjusted debt securities. AIAVX's year-to-date and 5-year annualized returns are 2.9% and 1.7%, respectively. AIAVX carries a Zacks Mutual Fund Rank #2 and the annual expense ratio of 0.72% is lower than the category average of 0.76%.
Federated Real Return Bond A (MUTF:RRFAX) pursues its investment objective by investing primarily in investment-grade, inflation-indexed bonds issued by the U.S. government. RRFAX's year-to-date and 5-year annualized returns are 1.3% and 0.4%, respectively. RRFAX carries a Zacks Mutual Fund Rank #2 and the annual expense ratio of 0.74% is lower than the category average of 0.76%.
Fidelity Series Inflation-Protected Bond Index (MUTF:FSIPX) invests the majority of its assets in inflation-protected debt securities included in the Barclays U.S. 1-10 Year Treasury Inflation-Protected Securities Index. FSIPX's year-to-date and 5-year annualized returns are 1.9% and 1.3%, respectively. FSIPX carries a Zacks Mutual Fund Rank #2 and the annual expense ratio of 0.20% is lower than the category average of 0.76%.
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