Higher inflation on the horizon? Investors reach for TIPS funds
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Investors last week poured into funds that provide protection against higher US inflation in a sign that some money managers expect a tight labour market and strong economy to finally halt a long stretch of muted price growth.
Funds that hold inflation-protected Treasuries (TIPS) garnered $1.2bn in net inflows in the week to November 22, according to Bank of America Merrill Lynch calculations based on EPFR data. It was the third-largest weekly inflow into TIPS funds on records dating back a decade.
Inflation in the US, and many other developed markets, has been sluggish as the global economy has recovered from the 2008-09 recession. And while central banks have held interest rates low and unleashed other stimulus measures, there appears to be scant evidence to support the idea that inflation will overheat in the near-term.
In fact, since 2010, the year on year rate of core consumer price growth, a measure that excludes food and energy prices, has fluctuated between 0.6 and 2.3 per cent, data from the Bureau of Labor Statistics show.
Market expectations for inflation in the future remain muted, with the five-year break-even rate that shows the premium demanded to hold Treasuries over TIPS sitting at 1.78 percentage points.
Wall Street economists are a bit more optimistic — the consensus estimate in a Reuters poll for core CPI growth next year is 2 per cent (the top estimate is 2.7 per cent).
Of course, the Street is not always correct. Economists at Nomura, for instance, pointed out over the weekend that the US economy has “consistently shown more positive momentum than we expected” since the second quarter.
The robust growth comes as the jobless rate sits the lowest level in 17 years. A combination of growth and a tight labour market is generally thought to stoke higher inflation.
Some analysts have also noted that the rise this year in oil prices could ultimately seep into broad measures of inflation, something that does not appear to be priced into fixed income markets.
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