We’ve been below 2% for a long time; but, will it continue?
Jim Lorenzen, CFP®, AIF®
So far, tariff-induced inflation simply hasn’t arrived. You’d think if it was going to, it would be here by now. And, the reason is simple: If inflation was in the ‘pipeline’, goods in current inventory would be marked-up in advance in order to raise cash to cover new inventory acquisition costs.
We’ve seen this before. When Mideast oil prices increased, prices at the local gas pumps went up immediately. But, that hasn’t happened with the trade-tariff fears.
Meanwhile, the Fed continues it’s race to the bottom. But, after the most recent cut, the dollar strengthened, making American goods more expensive and reducing demand – opposite the Fed’s intention. Weaker dollars attract foreign capital, increasing exports for American companies; so, the Fed’s losing-streak continues.
Vanguard and Wall Street Journal economists expect inflation to be closer to 2% over the next few years; but, as we know, predictions are one thing, surprises are something else. Inflation has been less than 2% over the past ten years, so it wouldn’t be surprising that the Fed would allow it to run above that number for a period.
For investors, this is where diversification can play a key role. Treasury inflation-protected securities (TIPS) are probably the best and purest form of hedging inflation. Another potential hedge is short-term corporate bonds. This is because if inflation is driven by a strong economy, consumption will increase and profits should be strong; however, it’s important to know what you’re doing: It’s important to understand credit risk – not simply trusting ratings – as well as the average duration of your bond portfolio, as well as how that duration has changed over time.
Of course, bonds can be effective as short-term inflation hedges; but a long-term time frame is another story. Nothing has outperformed stocks and bonds simply haven’t.
Remember, it’s not an either-or proposition. It’s about having a portfolio diversification design that fits your own desires and objectives – and your attitudes about risk. Best to work this out with someone who has seen it all a few hundred times and can help navigate the financial marketplace.
If you don’t know where to find professional help, you can ask your family and friends; you can also consult these resources:
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Hope this helps,
Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991. Jim is Founding Principal of The Independent Financial Group, a registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.