Here’s why this week’s 5-year TIPS reopening auction makes investment sense

Posted on June 13, 2021 by Tipswatch

By David Enna, Tipswatch.com

Can anyone make the case that a 5-year Treasury Inflation-Protected Security with a yield lagging inflation by 1.73% and an upfront premium cost of nearly 10% makes sense as an investment?

Hey, I can.

But that doesn’t mean I will be investing in Thursday’s $16 billion reopening auction of CUSIP 91282CCA7, creating a 4-year, 10-month TIPS. I probably won’t. Nevertheless, in today’s low-interest-rate environment — accompanied simultaneously by surging inflation — this TIPS reopening remains an intriguing investment, “relatively speaking.”

A TIPS is an investment that pays a coupon rate well below that of other Treasury investments of the same term. But with a TIPS, the principal balance adjusts each month (usually up, but sometimes down) to match the current U.S. inflation rate. So the “real yield to maturity” of a TIPS indicates how much an investor will earn above inflation.

CUSIP 91282CCA7 was created in an originating auction on April 22, 2021, when it generated a real yield to maturity of -1.631%, the lowest in history for any TIPS auction of any term. The Treasury set its coupon rate at 0.125%, the lowest it will go for a TIPS. Investors had to pay a sizable premium, about about $109.41 for about $100.32 of value, after accrued inflation and interest were added in.

It now trades on the secondary market, and you can follow its current real yield and price in real time on Bloomberg’s Current Yields page. As of Friday’s market close, it was trading with a real yield of -1.73% and a price of $110.30.

If that yield holds through Thursday’s auction, it would set a new auction low for any TIPS of any term. Investors at this week’s auction will actually pay a higher price than Bloomberg indicates, while getting additional principal. Accrued inflation and interest will put the price at about $111.45 for $102 of adjusted value. This TIPS will have an inflation index of 1.01804 as of the June 30 settlement date.

(Just for nerds: As an aside, it’s remarkable that this TIPS was originated on April 15 and non-seasonally adjusted inflation has increased 1.8% since then. The inflation accrual on a TIPS is applied two months after each monthly inflation report. So the calculation for this TIPS is half of February’s rate of 0.547, which is 0.274%, plus 0.71% in March and 0.82% in April. It adds up to 1.804%, and that’s how you get an inflation index of 1.01804).

Here is the trend in the 5-year TIPS real yield over the last five years, showing the remarkable move lower after the market mania of February 2020, which triggered aggressive moves by the Federal Reserve to suppress interest rates and by Congress to stimulate the U.S. economy:

So, how could this TIPS look attractive?

Thursday’s auction could result in a record low real yield for any TIPS in history, of any term. And investors will have to pay a large premium, just to under-perform inflation by about 1.73% over the next 4 years, 10 months. How could that look appealing? It can, because this TIPS might be the prettiest ugly duckling in a pond of extremely ugly ducks.

There is only one U.S. dollar investment that is both very safe and guaranteed to match official U.S. inflation over the next five years. That is the U.S. Series I Savings Bond, which carries a real yield of 0.0%, a whopping 173 basis points better than CUSIP 91282CCA7’s current return. But I Bonds come with a purchase cap of $10,000 per person per calendar year. Once you’ve made that purchase, where do you look for a very safe 5-year investment? Five-year Treasury notes? A 5-year bank CD? Both of those options are safe, but look very likely to severely lag inflation over the next five years.

If you think we are likely to have a run of higher-than-typical inflation over the next five years, this TIPS becomes a logical investment amid a bunch of disastrous choices. Here are the numbers under varying inflation scenarios:

Once inflation averages more than 2.53% a year, this TIPS will out-perform a 5-year Treasury note at 0.76% or a 5-year bank CD at 0.80%, currently among the best in the nation. But the Treasury note and bank CD have no upside potential; they are both going to return well below 1% for five years. The TIPS has unlimited upside potential once inflation averages higher than 2.53% a year.

For that reason, I think this 5-year TIPS is an attractive alternative to other safe 5-year investments.

Inflation breakeven rate

With a 5-year Treasury note currently yielding 0.76%, this TIPS would get an inflation breakeven rate of 2.49% if it auctions with a real yield of -1.73%. That means it will out-perform a U.S. Treasury note if inflation averages more than 2.49% over the next 4 years, 10 months. That’s high, but this breakeven rate has actually dipped a bit in the last two weeks.

Here is the trend in the 5-year inflation breakeven rate over the last five years, showing the remarkable surge in inflation expectations after Federal Reserve and congressional stimulus kicked in in March 2020:

A year ago, I would have said 2.49% is a ridiculously high breakeven rate for a 5 year TIPS. A year ago, in May 2020, inflation had averaged only 1.5% in the previous 5 years. This year, after an impressive surge in inflation, that average has risen to 2.3%. I have no idea what the “new normal” is going to look like, but an inflation rate of 2.5% (or higher) in coming years looks like a reasonable bet.

Conclusion

The key question for investors is: When do you think nominal and real yields will begin rising? If you think higher rates are coming soon, waiting to invest makes sense. If you think rates will remain stable or decline further, and you want to lock in inflation protection, an investment in this TIPS is reasonable. I expect demand to be pretty strong under these market conditions.

If you are planning to invest, keep an eye on that Bloomberg Current Yields page until the morning of the auction. Real yields have been volatile in the last week. This auction closes at noon EDT Thursday for non-competitive bids and finalizes at 1 p.m. I will post the auction results soon after the auction closes.

Here’s a chart of recent auction results for 4- to 5-year TIPS:

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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.

Posted in Bank CDs, I Bond, Inflation, Investing in TIPS | 11 Comments

U.S. inflation surges 0.6% in May, again higher than expected

Posted on June 10, 2021 by Tipswatch

By David Enna, Tipswatch.com

For the third month in a row, U.S. inflation surged to higher-than-expected levels in May, reaching the highest annual level in nearly 13 years, the Bureau of Labor Statistics reported today.

The Consumer Price Index for All Urban Consumers increased 0.6% in May on a seasonally adjusted basis, the BLS said. Over the last 12 months, the all-items index increased 5.0%; this was the largest 12-month increase since a 5.4% increase for the period ending in August 2008. The May numbers were well above the consensus forecasts of 0.4% for the month and 4.6% for the year.

Core inflation, which removes food and energy, rose 0.7% in May and 3.8% over the last 12 months, also racing well ahead of the consensus forecasts of 0.4% and 3.4%. That was the highest increase in core inflation since June 1992.

One amazing aspect of this report was that seasonally-adjusted gasoline prices actually fell in May, down 0.7% for the month but still up 56.2% over the last 12 months. I expected to see higher gas prices, caused by shortages throughout the Southeast thanks to the Colonial Pipeline shutdown. (Gasoline prices in the Southeast have definitely not fallen. Before seasonal adjustment, gasoline prices rose 4.2% in May, the BLS said.)

The index for used cars and trucks continued to rise sharply, the BLS said, increasing 7.3% in May. This increase accounted for about one-third of the all-items increase. Here are other highlights from the report:

  • Food prices increased 0.4% in May, the same increase as in April, but are up only 2.2% over the last year.
  • The May increase for food was mostly due to the index for meats, poultry, fish, and eggs, which increased 1.3% over the month. The beef index rose 2.3 percent in May.
  • The energy index was unchanged in May after declining slightly in April, but is up 28.5% over the last year.
  • Apparel prices rose 1.2% in May and are up 5.6% over the last 12 months.
  • The household furnishings and operations index increased 1.3% in May, its largest monthly increase since January 1976. Widespread shortages are being reported in furnishings.
  • The index for car and truck rentals continued to rise, increasing 12.1% after rising 16.2% the prior month.
  • The medical care index declined 0.1% in May after rising in each of the four previous months.
  • The costs of shelter rose 0.3% in May, and are up 2.2% over the last 12 months.

The May report again shows a widespread pattern of unexpectedly high inflation across the U.S. economy, with almost every category except energy showing strong price gains in the month. Here is the 12-month trend for all-items and core inflation, showing the impressive surge higher after the Federal Reserve and congressional stimulus programs stepped up in March 2020:

What this means for TIPS and I Bonds

Investors in Treasury Inflation-Protected Securities and U.S. Series I Savings Bonds are also interested in non-seasonally adjusted inflation, which is used to adjust principal balances on TIPS and set future interest rates for I Bonds. For May, the BLS set the inflation index at 269.195, an increase of 0.80% over the April number. This follows increases of 0.82% in April, 0.71% in March and 0.55% in February.

For TIPS. The new inflation index means that principal balances for all TIPS will rise 0.80% in July, following the 0.82% increase in June. Because non-seasonally adjusted inflation rose a bit faster than the seasonally adjusted number, you can expect a reversal of that trend in coming months. (Seasonal and non-seasonal numbers balance out over 12 months.) Here are the new July inflation indexes for all TIPS.

For I Bonds. The May inflation report is the second in a string of six months that will determine the I Bond’s new inflation-adjusted variable rate, which will be reset on November 1. After two months, inflation is up 1.63%, which translates to a variable rate of 3.26%, already getting close to the current rate of 3.54%. Four months remain, and a lot can happen in four months (especially summer months, when inflation is notoriously volatile.)

Here are the numbers so far:

What this means for future interest rates

The Federal Reserve continues to predict this surge in inflation will be “transitory,” but it’s disturbing that inflation has been running much higher than expectations for three months in a row, even while gas prices were stable. The Fed is hoping to discourage an “inflation psychology” seeping into our consciousness, because it could set off a snowball effect of higher wages and higher raw material costs.

From today’s Wall Street Journal report:

Food makers said their costs are climbing at an alarming rate, prompting them to raise some prices. “The inflation pressure we’re seeing is significant,” General Mills Inc. Chief Executive Jeff Harmening said at a recent investor conference. “It’s probably higher than we’ve seen in the last decade.”

He and his peers point to transportation, commodity and labor costs all increasing at the same time. They expect the trend to continue for at least the rest of this year.

The Federal Reserve tracks a different inflation index — Personal Consumption Expenditures — which was up 3.6% through April and looks likely to top 4.0% for May when that number is released later this month. The Fed wants inflation to “average” above 2.0% for a sustained time. It seems well on its way to reaching that goal.

At some point, probably soon, the Fed will need to begin “talking up” potential plans to taper its bond-buying stimulus programs, which would allow longer-term U.S. rates to begin rising. As of this morning, the stock market is rising nicely despite today’s inflation report. That indicates the financial markets don’t see Fed tapering beginning anytime soon.

But the Fed faces serious challenges if U.S. inflation continues to rise much higher than expectations.

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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.

Posted in I Bond, Inflation, Investing in TIPS | 28 Comments

Want inflation protection? Be wary when the fund salesman calls.

Posted on June 7, 2021 by Tipswatch

The Lord Abbet Inflation Focused fund is a mixed-bag short-term corporate bond fund, not a typical TIPS fund

By David Enna, Tipswatch.com

I have an elderly friend (she’s 90+ years old so I think it’s OK to call her elderly) who is whip-smart and able to monitor her own finances. But sometimes she calls me for advice on safety-first investments.

“I am not a financial adviser!” But I listen. In this case, she had a Goldman Sachs brokered CD that was paying 3%, but got called, leaving her with more than $50,000 in cash and no good alternatives that would yield more than 0.5%. This cash was now in the hands of a “wealth adviser” who is “affiliated” with her credit union.

She told the adviser that she is worried about surging inflation. His advice: Put that cash into the Lord Abbet Inflation Focused Fund, either class A or class C.

She asked me: “What do you think of these funds?” I think she already had a good idea what I was going to say. Like I said, she’s smart.

Well, let’s see … the class A version (LIFAX) comes with a 2.5% upfront load and an expense ratio of 0.70%, and the class C version (LIFCX) has no upfront load, but a 1.31% expense ratio and a 1% redemption fee. Does it make sense for a 90+ year old to pay a 2.5% load to buy into any mutual fund? No. Does it make sense to pay an expense ratio of 1.3% and a redemption fee of 1% when there are much cheaper options? No.

(FYI, LIFAX can be purchased at Fidelity — and probably other quality online brokers — with the load fee waived. But her wealth adviser wasn’t offering her that opportunity).

I am not a financial adviser, but this looks like questionable advice to me. My immediate advice would have been to just open an online savings account paying 0.5% and live with it. But my friend was looking for a safe investment with a reasonable return that could rise with surging inflation. She is very worried about inflation.

So, my suggestion was that she look at a couple of ETFs that hold Treasury Inflation-Protected Securities: Schwab’s SCHP, which holds the full range of maturities, and Vanguard’s VTIP, which holds maturities of 0 to 5 years. Both of these have expense ratios of 0.05% and can be purchased without any commissions at most brokers.

The Lord Abbet Inflation Focused fund is an easy “sell” right now because it has had a spectacular performance in the last year, with its class A shares gaining 21.4%, versus returns of about 7% for typical TIPS funds. But why was that gain so high? Because this fund skews much higher in risk, with large holdings of corporate bonds, asset-backed securities and even 13.5% of assets in junk bonds. Its U.S. Treasury holdings are right around 11% of assets. It is NOT a traditional inflation-protected fund, even though Morningstar classifies it as “Inflation-Protected Bond.”

This chart shows how it is unlike traditional inflation-protected funds, with low fees, no sales charges and investment focused on U.S. Treasurys:

Look back 10 years, and The Lord Abbot fund’s annual return is only 1.9% (class A) and 1.2% (class C). This fund carries much higher risk than the typical TIP fund, even though its duration is quite low, at 1.44 years. Here is how LIFAX has performed versus SCHP and VTIP over the last five years:

This chart — which doesn’t reflect any load fee paid by the investor — shows how the recent out-performance of LIFAX can’t overcome years of poor performance in a time of consistently declining interest rates. This is from Morningstar’s investment analysis:

“Lord Abbett Inflation Focused’s aggressive style and unconventional inflation-protection tools have contributed to a volatile experience for investors in its otherwise conservative peer group. … This strategy’s allocation closely mirrors Lord Abbett Short Duration Income LLDYX, which carries a risky profile through significant corporate bond stakes (40%-55% of assets) and securitized credit (35%-55%). Exposure to below-investment-grade issues accounted for 14% of this portfolio at the end of July 2020 and even reached 25% back in 2014. …

“(T)his team hedges against inflation via Consumer Price Index swaps as they are less sensitive to interest-rate spikes than TIPS. Still, they can be volatile with changes in inflation expectations.”

So, it is clear that Lord Abbet Inflation Focused is much more of a short-term corporate bond fund with very little direct exposure to U.S. Treasurys. That raises the question: How has it done versus more traditional short-term corporate bond funds, such as VCSH, Vanguard’s short-term corporate bond ETF, with an expense ratio of 0.05%? Here you go:

Keep in mind that this chart does not reflect the 2.5% load fee charged by advisers. LIFAX was down more than 20% in the depths of the market mania of March 2020, but has rebounded nicely since then. VCSH was less volatile.

So for the investor looking for a short-term corporate bond fund with an overlay of inflation swaps and high volatility, LIFAX could be worth a look. (But try to find a way to buy it without the load fee.) Otherwise, if you have a priority on safety and low fees, look elsewhere.

For risk-welcoming investors looking for a twist on inflation protection, I think a fund like The Quadratic Interest Rate Volatility and Inflation Hedge ETF (IVOL) is worth a look. I don’t own it and haven’t analyzed it carefully. It has an annual expense ratio of 0.99% — a negative — but at least it holds 85% of its assets in SCHP, so it is heavily exposed to TIPS. Then it adds long options tied to the U.S. interest rate curve, so it can benefit from volatility. It had a total return of 14.6% in 2020. It’s a new fund and may not have a large enough trading volume for your brokerage to allow dividends to be reinvested.

So what did my friend do?

After a couple of discussions with me — which basically confirmed her point of view — she asked her wealth adviser if he could put her $50,000 in SCHP or VTIP or some combination, and how much it would cost. She said he paused. Then he said, “I think I could do that with about a $300 commission.”

She laughed. I told you she is smart. She asked for the money to be sent to her by check, and she will no longer work with that adviser. She has a T.D. Ameritrade account where she can buy the ETFs she wants at zero cost.

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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.

Disclosure: I have investments in SCHP and VTIP.

Posted in Cash alternatives, Investing in TIPS, Retirement | 11 Comments

T-Mobile Money: A weird (but insured) way to earn 1% on your cash

Posted on June 1, 2021 by Tipswatch

And here’s the thing: You don’t need to be a T-Mobile customer

By David Enna, Tipswatch.com

Back in mid-February, my cellphone carrier T-Mobile sent me an intriguing email about what seemed to be a new service offering: T-Mobile Money, an FDIC-insured savings account that paid 4% on deposits up to $3,000 and 1% on all balances above $3,000.

Was there a catch? Of course there was a catch. To get the 4% “perk” you had to make at least one $200 deposit a month into the account, either through transfer or direct deposit. Plus, you had to be an existing T-Mobile customer. Since I was already a customer — of both the company’s excellent cellular service and the ill-fated TV streaming service — I jumped aboard. I opened an account. I deposited $3,000. Then I set up an automatic transfer of $200 a month into the account.

Bingo … I earned 4% on my initial investment for the partial month of February. This was so simple! This was so great! The requirement to make one $200 deposit a month was no barrier. I loved this!

Then … less than a month later came the bad news. T-Mobile was changing the terms for the 4% perk, effective March 31. The new terms were onerous: To earn 4% on the first $3,000, I had to make 10 purchases a month using the provided MasterCard debit card. And that meant “purchases,” not simply using the ATM card to withdraw cash. So the 4% perk was now useless to me. I rarely use a debit card for purchases (especially during a pandemic) and my credit cards already provide 1% cash back.

T-Mobile continued to advertise the old terms ($200 deposit a month) well into March. My initial reaction to all of this was to throw a fit, stomp my feet, and accuse T-Mobile of a “bait and switch.” This was happening at the same time T-Mobile was dissolving its TVision television streaming service, which I was using and actually liked. Grrrr!

Count to 10, Dave, and … calm down

After a bit of research, I realized that T-Mobile Money had actually launched in 2019 and so the change in the long-standing 4% perk couldn’t really be classified as a “bait and switch.” It was a “change in terms.” Throw out the 4% perk, and what remains? 1% on all deposits, with full FDIC insurance. Does that make sense as an investment? Yes, it does.

Once you retire, you get obsessive about hoarding some level of cash, even beyond the “emergency fund” recommendations of 6 months of expected spending. Having one or two years of “after tax” cash allows you to ignore stock market fluctuations and plan for vacations, big-ticket purchases, home repairs, etc., without needing to tap retirement funds or stock investments — incurring a tax consequence.

The problem right now is that you can earn next to nothing on cash in highly safe investments like bank CDs, short-term Treasurys and money-market accounts. The typical rate paid by your brokerage or bank account is something like 0.005%, if that. So T-Mobile Money’s offer of 1% in an FDIC-insured account is way more attractive.

Here’s a comparison of potential earnings for “cash-like” investments with very little risk, showing why this T-Mobile Money account stands out in a barren wasteland:

As the amount invested increases, the value of the 4% perk declines, because it only applies to the first $3,000. T-Mobile Money, paying 1% interest, easily outshines other very safe cash-like investments. So I stuck with it, and added funds to the account. Everything can be handled on the T-Mobile Money website, and through its excellent phone app.

Do you need to be a T-Mobile customer to open an account? No you don’t. The 4% perk is limited to existing T-Mobile customers, but everyone gets the 1% interest on all deposits.

Questions and answers about T-Mobile Money

Is the T-Mobile Money account FDIC insured?

Yes. The account is actually held at BankMobile, a division of Customers Bank. The FDIC certificate number is 34444. This means your deposits are insured by the Federal Deposit Insurance Corporation up to $250,000 per customer.

Can anyone sign up for a T-Mobile Money account?

The 4% interest up to $3,000 is only available to T-Mobile customers, but you don’t need a wireless plan with T-Mobile or Sprint to sign up for a T-Mobile Money account. To sign up for an account you must:

  • Be of legal age
  • Have a US government-issued ID or state-issued driver’s license/ID
  • Have a Social Security number
  • Have a street address within the U.S. and Puerto Rico, excluding other U.S. territories

What are the monthly fees?

There are no monthly fees or minimum balance fees, no overdraft fees, no transfer fees. For ATMs, there are no fees at 55,000+ in-network Allpoint ATMs worldwide and no T-Mobile Money out-of-network fees. However, customers may incur fees from ATM providers when using out-of-network ATMs or international ATMs.

How can I deposit money?

The business model seems to be set up around direct deposit of your paycheck or government payment and then use of the ATM card. So, direct deposit is allowed, and the website and app clearly show you your account number and routing number.

You cannot deposit checks at an ATM, but you can deposit them through the T-Mobile Money app on your phone, using the phone’s camera. Mobile check deposits are limited to $3,000 a day.

You can do bank transfers into T-Mobile Money in the app, but these are limited to $3,000 a day. However, you can also set up T-Mobile Money to receive an incoming deposit from your bank or brokerage. Then the amount can be higher, up to the bank or brokerage’s outgoing per day limit. (I have tested this and it works.)

Depositing a large amount of cash? Forget it. You’ll need a money order, check or direct transfer to make a deposit.

How can I withdraw money?

It’s a similar situation to depositing money. If you are initiating a withdrawal from inside the T-Mobile Money app or website, you are limited to withdrawing $3,000 a day. But if you initiate the withdrawal from an outside source (such as your bank or brokerage connected to T-Mobile Money) you are only subject to that account’s incoming limits.

So, advice: Make sure to set up both an incoming connection to your outside account on the T-Mobile Money site ($3,000 limit in or out per day) and also a incoming/outgoing connection to T-Mobile Money from your bank or brokerage account (probably a higher limit, set by your bank or brokerage, not T-Mobile Money.)

How long does it take for deposited money to show up in your available balance?

External transfers in take 2 to 4 business days to be available. Incoming wire transfers are available on the same day they arrive. T-Mobile Money says payroll-related direct deposits can be available up to 2 days early.

Can I open a savings account instead of a checking account?

No.

Can I open an joint account?

T-Mobile says: “Joint accounts are currently unavailable. Only one account may be opened per person.” There is also no apparent way to name a beneficiary for the account. This could be a major drawback from some investors.

Does T-Mobile Money provide free checks?

No. The online account sends you to Vistaprint so you can order your own checks, at a cost ranging from 10 cents to 16 cents per check. However, T-Mobile Money does provide three free checks when it sends you your initial ATM debit card.

Does T-Mobile Money rebate ATM fees?

T-Mobile says: “If you use an out-of-network ATM, we won’t charge you, but the ATM owner probably will, and we aren’t able to rebate those fees.”

Can you get T-Mobile Money support at a T-Mobile store?

No.

How does T-Money make sense as a business?

T-Mobile says: “We expect to see revenues from merchant transaction fees when a customer pays with their T-Mobile Money MasterCard debit card. Over time, we expect to see additional operational benefits in our core business in increased customer retention and reductions in payment expenses.”

Conclusion

Despite my disappointment with the bait-and-switch … er … “change in terms” for the 4% perk, I think earning 1% in an FDIC-insured account is attractive in our current market conditions. That’s probably nearly 100 times what your bank or brokerage cash account is paying, and about double the yield of the best-in-nation online savings accounts.

There are times I feel like a T-Mobile beta-tester (the TVision streaming service was an unfortunate example), but in this case, at least so far, T-Mobile Money seems to be a solid product.

If the terms change, or interest rates elsewhere improve greatly, my deposits are always available to invest elsewhere.

Posted in Bank CDs, Cash alternatives, Retirement | 25 Comments

All of a sudden, inflation is a ‘thing’

Posted on May 23, 2021 by Tipswatch

By David Enna, Tipswatch.com

I’ve been writing about inflation and inflation-protected investments for 10 years, and most of that time, actual U.S. inflation has been sleepy and dull. Suddenly, but not too surprisingly, that has changed.

Official U.S. inflation — measured by CPI-U, the Consumer Price Index for All Urban Consumers — rose at unexpectedly high rates in March and April, well above consensus forecasts. And it looks like this could continue for several months. The result: Inflation is suddenly a very hot topic. And that actually is worrisome, because when workers begin “accepting” that future inflation will be high … wages will rise and accelerate the trend.

Google emails me a daily search alert for “Treasury Inflation-Protected Securities,” and most days in the past there would be no email at all, or an email with one or two slightly-related stories. Now, that list is booming to 12 to 15 stories a day.

So let’s take a look at what media are saying about inflation.

Wall Street Journal, May 23

The stakes are high for investors. Inflation dents the value of traditional government and corporate bonds because it reduces the purchasing power of their fixed interest payments. But it can also hurt stocks, analysts say, by pushing up interest rates and increasing input costs for companies. …

As of Friday, the yield on 10-year TIPS was minus 0.826%—meaning investors would lose money absent any inflation—compared with 1.629% for the nominal 10-year Treasury note. That means CPI growth would need to average at least 2.45% over the next 10 years for the inflation-protected security to pay as much or more than the nominal Treasury.

To some, this makes TIPS the safest and best inflation hedge. Investors are nearly guaranteed to get their principal back if they hold the bonds to maturity. At current yield differentials, they can earn significantly more than regular Treasurys if inflation fears are realized.

Still, TIPS returns are likely to be paltry under almost any scenario, particularly if inflation comes below expectations.

Yahoo! Finance, May 21

About one in three U.S. adults say they’re spending more on groceries than they were at the start of 2021, according to a Morning Consult survey of 2,200 U.S. adults conducted May 17 to 19 for Bloomberg News. Red meat was the ingredient cited most often for its higher prices, with chicken right behind.

CNBC, May 21

“In general, inflation is usually negative for stocks,” said Amy Arnott, a portfolio strategist at Morningstar. She pointed to history as proof: Between 1973 and 1981, inflation rose by more than 9% a year. During the same period, stocks shed about 4% annually. …

Another good match for investors worried about inflation are Treasury Inflation Protected Securities, or TIPS, said CFP Nicholas Scheibner, a wealth management advisor at Baron Financial Group in Fair Lawn, New Jersey. These securities carry a similar risk as other fixed income investments, he said, but they add an adjusted principal amount if inflation increases.

E-piphany by Michael Ashton, May 20

The Federal Reserve has recently started to use the word “transitory” when describing inflation pressures in the U.S. economy. What they’re trying to indicate is that we shouldn’t worry, the pressures we are seeing right now will eventually pass. But that’s stupid. All inflation is transitory. …

Maybe what they mean is that “these price changes we are seeing are all the results of supply and demand imbalances in nominal space, so they’ll all reach equilibrium and inflation will go away.” If that’s so, then (a) they’re probably wrong, (b) that’s what inflation looks like anyway; it doesn’t manifest as smooth price changes across all goods at the same time, and (c) you still haven’t told me over what period it will take for this equilibrium to occur.

New York Times, May 20

It is too soon to show up clearly in the data, but there are anecdotes aplenty that companies are rapidly increasing pay. Just this week, Bank of America said it would start a $25-per-hour minimum wage by 2025, up from $20, and major chains like McDonald’s, Starbucks and Chipotle have announced significant moves toward higher pay in recent weeks.

Associated Press, May 20

Many economists, as well as the Federal Reserve, say not to worry about any of this. They’re convinced these fast price gains will prove fleeting. If the experts are wrong, however — remember last month’s jobs data, where economists’ predictions were wildly off the mark? — it could ravage the economy and force the Fed to reverse its record-low interest rate policy and trim the bond purchases that are boosting markets. … (B)e prepared to experience even more swings in the stock market as Wall Street’s biggest question waits even longer to be answered.

Barron’s, May 17

For business owners and consumers on the ground, official inflation data and policy makers’ commentary are an alternate reality. Inflation is here, say grocery shoppers, home buyers, manufacturers, and retailers who insist that their dollars are buying less. …

The gap between reported price inflation and the experiences of businesses and consumers is a signal to investors that inflation is hotter than it looks. Implications of the disconnect are vast, affecting Social Security payments, tax-bracket adjustments, and economic growth calculations, in addition to investment returns, inflation expectations, and interest rates.

“All you have to do is open up your eyes to see there is inflation pressure everywhere,” says Ed Yardeni, president of Yardeni Research. “We are in stimulus shock.”

MarketWatch, May 12

The Fed has been hit by two major data surprises. Last Friday’s weaker-than-expected April job report and Wednesday’s hotter-than-expected April consumer prices. …

As the economy reopens, “we could have more persistent imbalances between aggregate demand and supply that would put more persistent upward pressure on inflation than we and outside forecasts expect,” (Federal Reserve Vice Chairman Richard) Clarida said Wednesday after the inflation data was published.

“I expect inflation to return to – or perhaps run somewhat above – our 2% longer-run goal in 2022 and 2023,” he said.

Final thoughts

I was at a dinner party recently (with fully vaccinated friends) and the topic turned to cooking and shopping in general. I asked the group: “Do you think prices are rising much faster right now?” The immediate reaction was a loud “YES,” across the board, with people giving examples of the price of onions, meat, lumber, used cars, housing.

Consumers have been noticing higher inflation for months. In May, the U.S. media also noticed. The overall effect is that “inflation consciousness” is seeping into the U.S. economy. This trend will continue for several months, but could dwindle later in the year. Or not. We’ll see.

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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.

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