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iShares TIPS Bond Message Board

  • irvhal irvhal Apr 30, 2011 5:24 PM Flag

    Inflation - But what kind?

    Much discussion is now perking up about the current CPI formula understating inflation, with an emphasis upon an under-weighting of commodities. But perhaps what's needed is a revisiting of inflation and its variants. Inflation may indeed be a monetary or demand-pull phenomenon, begotten by money supply increases. But there's also cost-push inflation -- caused by cost increases for an item or items temporally prevalent in general production (e.g. oil), and structural inflation -- wherein finite resources are diverted from private to public use (e.g. military expenditures), producing reciprocal scarcity in private markets. Hence, we may need to look to more diversity in our inflation hedges (e.g. gold or oil as well as I-bonds or TIPs).

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    • "Hence, we may need to look to more diversity in our inflation hedges (e.g. gold or oil as well as I-bonds or TIPs)."

      This is my take on it for what it is worth.

      From 2004 to 2006 I had 1/3rd of my nest egg in gold and silver. Both seemed cheap compared to the price of toilet paper. I made 50% on both. Silver has more than quadrupled since I sold. Amazing. I was very bearish on our economy but clearly not bearish enough.

      Since then, toilet paper prices are up modestly. I could show Costco receipts for those who do not believe me. I track every penny I spend at Costco and I am just not seeing the inflation many claim (at least not yet).

      If you believe that gold and silver are excellent long-term toilet paper price hedges, then it would stand to reason that toilet paper is the true bargain right now. If you must own gold and silver at these prices, then at least back up the truck on toilet paper first (and anything else that stores well long-term).

      If gold and silver prices are currently predicting future inflation (as seen in items bought at Costco and/or Sam's Club), then we should eventually see that inflation show up in TIPS. It will just take some patience.

      I would also point out that the seasonally adjusted CPI is up 1.9% in just the last 4 months. That's a 5.9% annual pace. Is it a spike that will be followed by a crash or is it the beginning of stagflation? You tell me and we'll both know. I am comfortable owning TIPS though (especially long-term). I've been especially comfortable over the past four months. Go figure.

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