With interest rates expected to head higher in 2018, it’s assumed that fixed income would be a...
Getting Ahead of Inflation
08/19/2008 12:00 am EST
Bryan Perry, editor of The 25% Cash Machine, says inflation is picking up steam and he suggests one good way to stay ahead of it.
Despite the efforts of producers of goods to keep prices down in a soft economy, inflation at the consumer level is alive and well.
• Total consumer price index (CPI) jumped 1.1% from May up to 5% year over year.
• Energy and food prices drove total CPI, since food accounts for nearly 15% of the index and energy almost 10%.
• The year-over-year core rate bumped up to 2.4% in June from 2.3% in May.
One thing we should be aware of is that statistical measures of inflation, like the CPI, are very slow to react. So, even though the CPI’s current 5% ought to be alarming in and of itself, it actually tends to underestimate the real inflation that’s building, but which has yet to reflect the entire price structure of the economy.
Positioning some capital in inflation-indexed securities at this juncture makes all the sense in the world to me, especially if we can get a double-digit yield at the same time. And “Treasury Inflation-Protected Securities” sound like sweet music to the ears of income investors. It’s hard to argue with the safety of government bonds.
I want to get out in front of what I believe will be a series of Federal Reserve rate hikes starting late this year and into 2009.
Right now the Fed must keep interest rates artificially low to keep stimulating a domestic economy that’s still shedding jobs at a rate of 94,000 per month—although we likely won’t see the Fed raise rates until after the election, perhaps at the December Federal Open Market Committee meeting.
So, let’s put some of our high-income capital to work by buying the SPDR Barclays Capital TIPS (Amex: IPE) at market. (The ETF closed above $51 Monday—Editor.)
IPE seeks investment results that correspond to the price and yield performance of an index that tracks the inflation-protected sector of the United States Treasury market. It does this by tracking the total return performance of the Barclays US Government Inflation-Linked Bond Index.
SPDR Barclays Capital TIPS ETF carries a dividend yield of 10.75%. Please note that the dividend changes every month. So go to www.etfconnect.com and click on “Find a Fund” to get the current yield and a history of dividend payments.
It’s possible we’re a little early on this strategy, but I definitely don’t want to have to chase the inflation train when it leaves the station.
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