Why firming inflation data could lead to a rate rise sooner
3 must-read reasons why a rate hike is inevitable (Part 4 of 5)
Inflation data are firming. Another reason I think the Fed may have to move sooner than many believe is the growing evidence that tighter short-term labor market conditions are beginning to spur some wage inflation. While this inflation is mostly occurring for those with specific skill-sets that employers deem valuable, wages for non-supervisory and production workers have also been ticking up. In fact, in Friday’s August jobs report, they were up 2.5% year over year, a year-over-year increase not seen since a few years ago. Beyond mere wage inflation, there has been a broad-based firming in a range of inflation data in the first half of the year, including consumer price index levels, producer price index levels and personal consumption expenditures index levels, all of which are considerably higher than the beginning of 2014 and well above year-prior levels.
Market Realist – The graph above shows how both the Producer Price Index and Consumer Price Index have been increasing in the past year, showing inflation data firm up.
For investors in the U.S. bond market (BND), rising inflation means higher rates and declining prices for U.S. Treasuries (TLT). Investors often look to Treasury inflation-protected securities (TIP), gold (GLD), and silver (SLV) as inflation protection measures. But TIPS have their shortfalls in the form of lower nominal yields. which aren’t worth it if inflation remains low. There are other options. Technology (XLK), real estate (IYR), and U.S. large-cap equities (SPY) seem more lucrative.
Read our series Must-know: Is now the right time to seek inflation protection? to understand how you can protect your portfolio from inflation.
Read on to the next part of this series to see how excessively low rates can harm the economy.
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