On Track For 2.5% Inflation By December 2016: Update November 2016

| About: Schwab U.S. (SCHP)

Summary

On Sept. 19, iMarketsignals estimated an inflation rate of 2.5% for December 2016. With the Oct. 21 update we predicted 1.7% for October 2016.

Actual October inflation came in at 1.6%, the December inflation estimate remains at 2.5%.

With inflation rising, and markets uncertain, Treasury Inflation Protected funds (TIPS) should remain a reasonably safe investment. Conventional bond funds are expected to perform worse than TIPS funds.

With our article "2.5% Inflation By December 2016, This Negative Inflation Surprise Favors TIPS Over Conventional Bonds!" published Sept. 19 on Seeking Alpha, and updated Oct. 21, we predicted a 2.5% inflation rate for December 2016. The premise for this estimate is keeping the food and energy indexes constant and letting the base index (all items less food and energy) continue to rise at the same rate it did the previous 18 months. The assumption is that this rise will only be halted by an increase of the federal funds rate.

The Updated October inflation rate came in at 1.6%. In Table 1 below, the latest estimates, the estimated December inflation remains at 2.5%.

Table 1: Future CPI and Y-on-Year Inflation

CPI

inflation

Food

Energy

Exluding Food
and Energy

Actual Sep.

241.4

1.5%

247.9

195.9

248.7

Estimate Oct.

241.8

1.7%

247.9

195.9

249.2

Actual Oct.

241.7

1.6%

248.1

194.7

249.2

Nov-16

242.1

2.0%

248.0

194.7

249.7

Dec-16

242.5

2.5%

248.0

194.7

250.2

Jan-17

242.8

2.5%

248.0

194.7

250.7

Feb-17

243.2

2.6%

248.0

194.7

251.2

Mar-17

243.6

2.3%

248.0

194.7

251.7

Click to enlarge

In this publication Vanguard states that for a negative inflation surprise, and irrespective of Fed action, conventional bond funds will perform worse than TIPS funds like ETFs (NYSEARCA:SCHP), (NYSEARCA:TIP) or mutual funds (MUTF:VIPSX). With inflation rising, and markets uncertain, TIPS should be a reasonably safe investment for some time. Conventional bond funds are expected to perform worse than TIPS funds.

Disclosure: I am/we are long VIPSX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.