The Federal Reserve says not to worry about the 2.6% jump in the CPI. But the bond market is skeptical and it may be time to get yourself some protection.
In the past year:
—house prices have gone up 12%.
—lumber prices have tripled.
—shares of mediocre companies like The New York Times, American Water Works and Duke Energy have climbed to 40 times trailing earnings or more.
Dollars, it seems, aren’t going as far as they used to in the acquisition of hard assets, real estate or business assets. This is not surprising, given how many of those dollars are being manufactured at the Federal Reserve.
The Fed conjures up new money as it expands its collection of Treasury bonds. Its balance sheet has ballooned by $3.4 trillion since the start of last year. The official word for this process is “stimulus.”
Is there any risk that asset inflation could turn into wage inflation and generalized price inflation? That this process could feed on itself? The ministers at the Fed say there is nothing to worry about. Why, the Consumer Price Index is up only 2.6% from a year ago, and even that jump, they say, is a transitory phenomenon. We’re just bouncing off the depressed commodity prices seen early in the pandemic.
Maybe. But maybe that CPI jump was not transitory at all. The Economic Cycle Research Institute, a private consulting service, publishes what it calls a Future Inflation Gauge. (The monitor is calculated from an undisclosed mix of factors that probably include job growth and industrial prices.) The FIG, at 95 in September, has recently shot up to 130. What that means, explains ECRI co-founder Lakshman Achuthan, is that the inflation rate is likely to trend up, not turn back down, over the next six months.
Certain people are putting more faith in the whiffs of inflation they see than in the pronouncements from the Fed. Those would be bond investors. The spread between the yield on conventional 10-year Treasury bonds (1.58%) and the yield on inflation-protected ones (-0.78%) has widened to 2.36%, double what it was a year ago.
That spread, called the 10-year breakeven rate, is very close to the market’s expectation for the inflation rate between now and 2031. (The spread is slightly boosted by a risk premium attached to the conventional bonds and slightly depressed by a lack of liquidity in the inflation-protected bonds.) This graph plots the action in the breakeven rate over the past 16 months:
In short, the breakeven rate, depressed at first by the pandemic, has rebounded to the somewhat disturbing level of 2.4%.
A 2.4% annual inflation rate is not horrible, at least not in comparison to the damage to the dollar during the 1970s. Still, it’s enough to double the cost of living over the course of a 30-year retirement.
Monetary Cassandras have been fretting about coming inflation for years. Until a year ago this gang of worriers looked…