“This 7.9% rate is a jumping off point for what March will bring us.”
As expected, U.S. inflation continued at a four-decade high in February, and things are likely to get worse with the spike in commodity and transport costs in March. Buy gas lately? Or food? Ouch.
What does it all mean? Where is inflation heading? Let’s get some answers from inflation guru Michael Ashton and his “Cents and Sensibility” podcast. I am a fan of this podcast and Ashton’s work because he has deep knowledge of how inflation works, but can explain complex issues in an entertaining way.
In this episode, Ashton asks:
- How relevant are food and gas prices in the overall inflation picture? Why do these basic costs get excluded from “core inflation”? Won’t they eventually force wages to rise?
- Is inflation likely to peak soon?
- Why is it unlikely that the Federal Reserve will act decisively to drive down soaring inflation?
- What is the pace of likely Federal Reserve rate increases?
Here is his podcast intro: “Another month, another 40+-year high in inflation. 7.9% y/y for headline, 6.4% on core, and we’re not yet at the peak. Moreover, the peak is likely to be broader and not sharp, because inflation has infected the whole basket and changed the equilibrium that we are going to recede to. It’s as if a juggler has moved from juggling two balls to juggling five; that is a stable equilibrium and will resist moving back. And the Fed is probably going to be careful before upsetting the juggler too much (the Inflation Guy really had to work hard to resist a balls pun).“
Have a listen:
Who is Michael Ashton?
His audiences know him as the “Inflation Guy.” He is a pioneer in the U.S. inflation derivatives market. Before founding his company, Enduring Investments, Ashton worked in research, sales and trading for several large investment banks including Bankers Trust, Barclays Capital, and J.P. Morgan.
Since 2003, when he traded the first interbank U.S. CPI swaps, and 2004 when he was the lead market maker for the CME’s CPI Futures contract, he has played an integral role in developing new instruments and methods for accessing and hedging various inflation exposures. In 2016, Mr. Ashton published What’s Wrong With Money? The Biggest Bubble of All. He is a graduate of Trinity University and lives in Morristown, New Jersey.
Have a question? Get the Inflation Guy app in the Apple App Store or Google Play, or email InflationGuy@enduringinvestments.com.
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David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. The investments he discusses can purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.
One problem with TIPS in a retirement account is that they don’t throw-off enough interest to cover required minimum distributions. So, you have to get the RMD amount for the TIPS from some other retirement account.
True, you would need to pair individual TIPS with more conventional bond funds (or TIPS funds) to have the liquidity to pay the RMDs.
Entertaining yes, but I have never based my investing on anyone’s predictions. That includes my own of course.
Seems like a good decision. But in this podcast, Michael Ashton is not giving any investment advice, just opinions on where inflation is heading and future Fed actions. Plus information on how inflation actually works.
Inflation will increase. Looks like I Bonds are going up as well so that’s going too continue to be a good buy. Tips as well are too.
A guaranteed negative real return doesn’t look like a great buy to me, on the TIPS that is. And that is before taxes.
The problem is we will never know the answer to that until years down the road. My investment plan calls for building a TIPS ladder over the coming years, and I bought in 2021 at a negative real return. I certainly recall wondering if that was really foolish. But, so far, that turned out to be a wise decision relative to purchasing nominal treasuries. In a year, who knows.
I agree with Clark that if you are buying into a TIPS ladder and you are spacing out purchases and plan to hold to maturity (preferably in a tax-deferred account) then TIPS remain a reasonable investment in 2022. There are no safe investments, other than I Bonds, that can match official U.S. inflation in the near- to mid-term. TIPS have upside potential if inflation runs very hot.
Yes, definitely in tax-deferred. My fixed income plan in tax-deferred calls for splitting between nominals and TIPS, since I do not know what the correct answer is! I will be half right and half wrong. Duration-matching (holding to maturity) accomplished via ladder, to deal with interest-rate risk. I-bonds in taxable, of course, as part of the total fixed income side.