On Track for 2.5% Inflation by December 2016; Update November 2016.

  • On September 19, we estimated an inflation rate of 2.5% for December 2016, and 1.4% for September 2016.
  • Actual September inflation came in at 1.5%, the December inflation estimate remains at 2.5%.
  • With inflation rising, and markets uncertain, Treasury Inflation Protected funds (TIPS) should remain a reasonably safe investment. Conventional bond funds are expected to perform worse than TIPS funds.

In our article “2.5% Inflation By December 2016; This Negative Inflation Surprise Favors TIPS Over Conventional Bonds!”, published September 18 here, we predicted a 2.5% inflation rate for December 2016. The premise for this estimate is keeping the food and energy indexes constant and letting the base index (all items less food and energy) continue to rise at the same rate it did the previous 18 months,  the assumption is that this rise will only be halted by an increase of the federal funds rate.

The actual September inflation rate (published October 18) came in at 1.5%. In Table 1 below, we update our September estimates, and the updated estimate for the December inflation remains at 2.5%.

Table 1: Future CPI and Y-on-Year Inflation

 

CPI

Y-on-year
inflation

Food

Energy

All items less
Food and Energy

Sep-16
Actual

241.2
241.4

1.4%
1.5%

247.7
247.9

193.5
195.9

248.8
248.7

Oct-16

241.8

1.7%

247.9

195.9

249.2

Nov-16

242.2

2.0%

247.9

195.9

249.7

Dec-16

242.5

2.5%

247.9

195.9

250.2

Jan-17

242.9

2.5%

247.9

195.9

250.7

Feb-17

243.3

2.6%

247.9

195.9

251.2

Mar-17

243.7

2.3%

247.9

195.9

251.7

What does this mean for the investor? In this publication Vanguard states that for a negative inflation surprise, and irrespective of Fed action, conventional bond funds will perform worse than the TIPS funds like ETFs (NYSEARCA:SCHP), (NYSEARCA:TIP) or mutual funds (MUTF:VIPSX). With inflation rising, and markets remaining uncertain, TIPS should be a reasonably safe investment for some time. Conventional bond funds are expected to perform worse than TIPS funds.

Posted in blogs

Leave a Reply

With reference to Section 202(a)(11)(D) of the Investment Advisers Act: We are Engineers and not Investment Advisers, read more ...
By the mere act of reading this page and navigating this site you acknowledge, agree to, and abide by the Terms of Use / Disclaimer
Share This