By Jack Hough
Nov. 20, 2021
Don't get caught flat-footed on inflation this Thanksgiving when family and friends gather to argue politics over dinner. Shop around beforehand for data to fit your side.
"Survey Shows Thanksgiving Dinner Cost Up 14%," reads the title of a new report from the American Farm Bureau, a lobbying group. Putting aside the fine details of who holds sway over prices, that's not a good look for the party in power—the Democrats, sort of. On the other hand, the Department of Agriculture says that Thanksgiving staples prices are, in fact, up 5%. That's enough to pinch the budget-constrained, but it's hardly hyper-yamflation.
Why the disconnect? It comes down mostly to turkey and timing. The USDA assumes a 12-pound bird, priced at 88 cents a pound, based on advertised prices during the week ended on Nov. 12. The Farm Bureau uses a 16-pounder, priced at $1.50 a pound, based on numbers collected from "volunteer shoppers" from Oct. 26 to Nov. 8. But in the body of the report, it notes that turkey had tumbled to 88 cents a pound by publication date, as stores ran sales closer to the holiday. That discrepancy notwithstanding, I know which group I'd rather eat with. Beyond turkey, the USDA includes only potatoes, green beans, and milk in its math, whereas the Farm Bureau adds these plus stuffing, rolls, pie, and whipped cream.
If pricing turkey can get murky, think about how political passions might skew the current debate over broader inflation, and where it's headed, and what to do about it as investors. And consider not overhedging.
Some assets that are overtly tied to consumer prices look expensive, says Katie Nixon, chief investment officer of Northern Trust's wealth management arm. "I do think investors ultimately who are overpositioned for inflation will be disappointed," she says. "You're probably better positioned for inflation than you think you are right now owning the S&P 500."
The latest reading on the consumer price index shows a 6.2% jump from last year, the fastest in three decades. Some of that, like a 9.8% increase in new-vehicle prices, is probably related to reopening demand and supply-chain snarls, but there is rising concern that part of the faster inflation rate will stick.
For one guess on how much of the current inflation rate is tied to demand, rather than extraordinary factors, look at the median consumer price index, which tracks the middle good ranked by price increases. It's up 3.1% year over year. Or look at something called the 16% trimmed-mean CPI, which is like the regular CPI, but with the highest and lowest eight percentage points of price changes lopped off. It's up 4.1%.
Of course, that is past inflation. To know what future inflation will look like, you would have to predict shopper behavior, which is difficult, even for shoppers. A survey of U.S. consumer confidence recently fell to its lowest level in a decade, but retail sales in October rose by a seasonally adjusted 1.7%. If you somehow could accurately predict inflation, the next thing to guess would be how the Federal Reserve would respond, and how investment markets would react, which will depend on whether inflation is seen as healthy or overheated.
Supposing you've got a handle on all of that, and feel prices will run hot, the next question is: What to buy? Treasury inflation-protected securities, or TIPS, are overtly linked to the CPI, and so provide slam-dunk inflation protection, except for two things. To buy in for five years at the moment, you have to agree ahead of time to lose 1.9% a year after your inflation adjustment. Also—and this might be nitpicking—the CPI isn't the same as your personal inflation rate. It's the rate for a nonexistent consumer whose buying precisely matches the index weightings. A bachelor retiree, for example, might fall short of spending 1.092% on "women's and girls apparel." Higher outlays for tomatoes than lettuce? Sounds un-American. More on booze than all other beverages combined? If you insist.
Gold is an inflation hedge, but only reputationally, not statistically. It lost money during bouts of elevated inflation from 1980 to 1984, and again from 1988 to 1991.
Stocks are just the thing, regardless of whether inflation roars or whimpers. The S&P 500 returned double-digit yearly percentages over the 15 years ended in 1988, when average inflation topped 6%; and over the next 15 years, when inflation was just under 3%; and the 15 years after that, when it was closer to 2%.
Indexers can make sure they have money spread overseas. Markets like Europe and Japan are cheaper than the U.S., and have more cyclical exposure, which could come in handy if inflation remains elevated.
For bonds, there are few good answers, but no shortage of iffy ones. Some strategists favor shifting money to junk bonds. An index of them recently yielded 4.4%, or nearly triple the 10-year Treasury yield. And if inflation stems from a strong economy, junk issuers could be in line for ratings upgrades.
But Northern Trust's Nixon says the purpose of quality bonds is to provide diversification, not plump returns, and junk is no substitute: "When you have a correction, you're going to be glad you have high-quality, short-duration fixed income."
Write to Jack Hough at email@example.com. Follow him on Twitter and subscribe to his Barron's Streetwise podcast.
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