The inflationary CPI stage is all set, are you braced for it?
The CPI for March is set to come out on Tuesday, setting the stage for a nerve-racking week as investors are keeping a close eye on inflation. Predicting inflation may be one of the most crucial tasks for suitable investments since runaway inflation will depress bond prices and stock market performances when continuous rate hikes by the Fed are priced in by the market.
There are two versions of the CPIs that measure inflation from different perspectives. One is the headline CPI, which includes a basket of products and services paid by consumers. The other is the core CPI, which excludes food and energy because their prices are sometimes too volatile to reflect the actual changes in the price levels caused by inflation. Thus some analysts prefer to use the core CPI to gauge and predict inflation.
Both CPIs have skyrocketed to the highest territory since the 1990s, signaling that current inflation is rampant enough to stir considerable anxiety for investors.
Potent prognosticator: TIPS
TIPS, standing for Treasury Inflation-Protected Securities, has become extremely popular recently as market participants want to predict inflation better. TIPS serves as an effective tool to forecast inflation by subtracting its interest rates from Treasury yields with the same maturity.
For example, if the interest rate of a 10-year TIPS is 1% while the 10-year Treasury bond yield is 3%, then the expected annual inflation rate over the next ten years is 2%. This rate is also called the TIPS breakeven rate.
What are current market expectations for inflation?
As the charts shown below, the 10-year expected inflation rate is around 2.84%, edging toward the 3 percent target. This reading is astonishing, considering the core CPI for February is 6.4%. So the long-term view about inflation is not as harsh as the short-term one. Perhaps investors have anticipated that the Fed will implement more hawkish actions to suppress inflation.
How do pros allocate investments facing inflation?
Generally, veterans' favorable ones come with commodities, gold, and TIPS, which can be invested through $SPDR Gold ETF (GLD.US)$, $Energy Select Sector SPDR Fund (XLE.US)$, $Ishares S&P Gsci Commodity Idx Units Of Beneficial Interest (GSG.US)$, $iShares TIPS Bond ETF (TIP.US)$, etc. Yet recent inflation concerns have abated a bit, as is reflected by the decline of the Tips Bond ETF with investors dumping TIPS in reaction to a Fed more worried about inflation than about economic growth. Still, inflation-proof investments can be promising for those who think inflation would persist.
Disclamier: Investing involves risk and the potential to lose principal. Past performance does not guarantee future results. This is for information and illustrative purposes only. It should not be relied on as advice or recommendation.
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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