While inflation rates have remained relatively low, they have shown signs of life recently. As a result, many investors are wondering if it’s time to make changes to their portfolios to prepare for the inevitable rise in rates.

As we’ve said many times over, you cannot print pallets of money in Washington without the side effect of inflation. There is little debate on this. It’s coming… but when is the question. From our view, it may still be a while before it arrives.

Consider these facts:

  1. Consumer inflation is still historically low.
    While we’ve seen the Consumer Price Index nearly double this year, it’s only risen back to its three-year average. As long as the upward trend slows, it shouldn’t be too worrisome in the short term.
  1. Other inflation measures look fairly low.
    The Producer Price Index (PPI), which measures selling prices of domestic producers is at 1.8 percent, which is its post-recession average. In addition, the Fed’s preferred inflation measure is at 1.5 percent, well below its target of two percent.
  1. Inflation expectations remain tame.
    Longer term inflation expectations can be gleaned from the TIPS (Treasury Inflation-Protected Securities) market, which currently gauges ten year inflation at 2.25 percent and remains quite stable.
  1. Wage inflation is the key.
    We’ve seen wage inflation remain stubbornly low since the 2008 recession. Hourly wages are rising at two percent year over year. Broader measures of wage inflation are even lower.
  1. The Fed remains noncommittal.
    While the Fed has concluded its quantitative easing exercises, it has shown little conviction toward a rate rise.

With tepid economic growth and low wage growth, it’s difficult to make the case for a rise in rates anytime soon. Improved economic momentum is the key indicator. If and when we see a sustained acceleration in economic activity, then we’d expect to see interest rates and inflation rise with it. We think the Fed will err on the side of waiting longer, since raising rates too soon might choke off signs of momentum from a sluggish economy.


Are you concerned about how inflation might be affecting your portfolio? Call us and let’s talk about it.