The Fed is expected to make a major commitment to ramping up inflation soon

davfor

The Federal Reserve is completing a year-long policy review and is expected to announce the results soon.
One big change would be a harder commitment to getting inflation higher, through a pledge not to raise rates until it hits at least 2%. Markets have been betting on higher inflation, with surging gold prices, a falling dollar and a rush to inflation-indexed bonds.

Yardeni said the approach would be “wildly bullish” for alternative asset classes and in particular growth stocks and precious metals like gold and silver. Guha said the Fed’s moves would see “real yields persistently lower, the dollar lower, volatility lower, credit spreads lower and equities higher.”

https://cnbc.com/2020/08/04/the-fed-is-expected-to-make-a-major-commitment-to-ramping-up-inflation-soon.html

Sven

Time for TIP funds, anyone?

hank

Wouldn’t printing more $$ do the trick? I’m waiting for the Fed chopper to fly over and drop a few Franklins. Nothing yet except some kid buzzing the neighborhood with a drone. Been waiting all summer for some deck wood to build a new deck. Nowhere to be found. I guess that would qualify as “deflation“ because the supply has deflated? Or maybe “nonflation” since there’s no product, and therefore no price?

I’m waiting for a really intelligent post to go up here re TIPS. Darned if I’ve really ever understood them. Nor have I ever owned them. But I suspect that a “TIPS fund’ would be a different (potentially inferior) animal to (owning) an inflation indexed bond - or whatever Treasury calls them.

Old_Joe

Wouldn't you think that all of the money Congress is pumping out (which I'm totally in favor of, BTW) would do the trick?

hank

Old_Joe said:

Wouldn't you think that all of the money Congress is pumping out (which I'm totally in favor of, BTW) would do the trick?

Yes. I believe it well at some point. But the timing is uncertain. Once the genie is out of the bottle there will be hell to pay. You can’t just pull a lever and turn inflation off. I’m cursed with a good memory. Still recall what prices were when I retired in the late 90s. To me, there’s been a lot of inflation over those 20+ years. An early addition I had added to the house back than would easily cost 2 (if not 3) times as much today.

catch22

Hi @Old_Joe and @hank ......et al

Tangent considerations for this thread.

The below calculator is based upon the government CPI; which many agree is a flawed gauge. I agree with this view. Aside from whatever one may conclude is an average of components within the official CPI affecting the country overall; inflation for some high value items (housing) is regional/local. Some other local costs that vary by location is the cost of services needed by regular folks; being hourly rates for electricians, mechanics, skilled carpenter, etc. Auto purchase prices, on the other hand; may not vary as much today, as decades ago.
I've used the below calculator for studying whatever. An example: An electronics technician position I held in 1971 paid $12,000/year. Based solely upon the CPI index, this same position today would require an annual salary of $76,000 for a break even number.

Simple
inflation calculator

As to TIPs bond sector investments. I don't know that this area will have a particular impact from real or perceived inflation. Today, IMHO; these bonds are impacted more as a safe haven for scared money; not unlike other AAA U.S. issues. As of a few days ago, the etf TIP is +8.5% YTD, and the etf LTPZ (long duration TIPs) is +24.1%. Neither of these etf's are reacting to inflation today, eh?
I find no need to purchase TIP's from the Treasury. Purchase of a fund or etf is as simple as a click at your investment company site, yes? As stated previous, not all TIP funds are equal. Active funds may have 20% invested into corp. bonds. Review holdings before a purchase, if you want pure TIPs.
TIPs, obviously; are just another sector of bondland. Not unlike the major equity sectors of the SP500.
On the personal side: If one considers a purchase, IMHO, the percentage should have impact upon your portfolio. A 1% of a total portfolio value purchase wouldn't mean much. Your portfolio likely already contains some TIPs mixed into a fund. If you're serious about a purchase, the percentage should high enough for the reward. Yes, this increases the risk (be it bonds or equity). BUT, your money is already at risk as an active investor; or you would not have a need for this forum. You'd have your money parked in CD's (negative, inflation protected growth today, eh?).

NOTE: from mid-July......The U.S. Treasury just completed its auction of $14 billion in a new 10-year Treasury Inflation-Protected Security, with a historic result: A real yield to maturity of -0.93%, the lowest in the 23-year history of TIPS auctions of this term.
ALSO: The German 10 year bund remains around a -.5% yield, and yet safety purchases continue to push or hold the yield low; thus resulting in price appreciation. Folks are still making money with these crazy yields.

Time to hush my view.

Chores call.
Take care,
Catch

Derf

@catch22 : ''As of a few days ago, the etf TIP is +8.5% YTD, and the etf LTPZ (long duration TIPs) is +24.1%. Neither of these etf's are reacting to inflation today, eh?"
Did you say this tongue in cheek ?
Seems to me the higher these go, etf's, the more inflation ?!
Derf

Derf

@hank ; " Wouldn’t printing more $$ do the trick? I’m waiting for the Fed chopper to fly over and drop a few Franklins. Nothing yet except some kid buzzing the neighborhood with a drone. "
I received my Franklins by mail. Did you get your stimulus check?
Stay safe, Derf

hank

Hi Derf - Yeah - I was one of the last ones to receive it, but I got the $1200 bonus check along with the signature. Thankfully, the USPS was still functional than.

Today the President unveiled a new plan that surely should ignite inflation, especially if we keep spending like a drunken sailor. The Plan - Deceptively simple. “Spend more. Tax less.” Why didn’t somebody think of it before? Also has a nice ring to it. I’m thinking it might catch on with the public the way Miller Beer’s early slogan for Miller Lite caught on years ago. “Tastes Great!...Less Filling!"

catch22

Hi @Derf
The below link identifies 952 institutional owners of the TIP etf. Another source indicates institutional and mutual fund companies comprise 63% ownership of the TIP assets. The suspected regulars would be pension and mutual funds, insurance companies and banks. What the desire may be for these owners is not known. I imagine some actually intent to hold these longer term, while others use TIP for short term "cash" positions (collateral) and actual trading (buy low/sell high).
As to my....."Neither of these etf's are reacting to inflation today, eh?". I still feel many of the holdings by whomever is not totally related to pending inflation worries.

Institutional ownership of the TIP etf.

Regards,
Catch

Crash

Helping to ramp-up inflation? On what planet do we need THAT? Do these people EVER walk into a grocery store and actually NOTICE the prices? Happening in Canada, too. And Canada's currency has been self-devalued with the killing of the penny. If you have change coming back from your purchase, it will be either rounded up or down, to the nickel. Ya.

msf

"Do these people EVER walk into a grocery store ...?"

Sounding like a broken record, I'll repeat that people tend to notice "pain" (rising prices, investment losses) more than they notice positive events (prices going down, investments gaining). Also that the CPI incorporates prices of everything, not just the ones going up. Perhaps we need an ulcer index for prices?

It's likely you haven't noticed the deals one can get now on airplane trips. Wait, you mean you're not taking advantage of all these travel bargains?

WaPo: For the unemployed, rising grocery prices strain budgets even more
Beef and veal prices rose 20.2 percent, and eggs rose 10.4 percent since February, according to data released Friday by the Bureau of Economic Analysis
https://www.washingtonpost.com/business/2020/08/04/grocery-prices-unemployed/

Overall inflation has not been a pressing concern since the recession touched down in February. Last week, Federal Reserve Chair Jerome H. Powell said consumer prices have been kept in check due to weak demand, especially in sectors such as travel and hospitality that have been most affected by the pandemic. But food prices are the exception.

hank

Tracking U.S. Lumber, Steel, Concrete, Gypsum, Glass, and Other Construction Material Costs
Here

@msf - please note the 3-year price increases from 2016-2019 (left side of chart). What’s more important? An airplane seat or a dry roof over one’s head?

davidrmoran

moreover, many, though not all, fast food and casual dining chains are doing just fine, my consultant kid informs me, even though these are areas where it's easy for consumers to (and you would expect them to) cut back or at least trim expenditures, quite aside from health matters

the trimming has not happened at all the way many expected it to

msf

That's the issue I was alluding to in my apparently feeble attempt at a joke about buying up cheap airline tickets. How, and how quickly, the basket of goods should be adjusted for consumer purchase patterns is a good question.

The way it's currently done: "The CPI market basket is developed from detailed expenditure information provided by families and individuals on what they actually bought. There is a time lag between the expenditure survey and its use in the CPI. For example, CPI data in 2016 and 2017 was based on data collected from the Consumer Expenditure Surveys for 2013 and 2014."
https://www.bls.gov/cpi/questions-and-answers.htm#Question_2

The construction industry has its own problems with boom and bust cycles. On that basis alone it would seem to make more sense to smooth the prices of its materials over a full cycle rather than to project "boom" price increases to the present.

Here's a graph with more current data:


And the current breakdown by component:


News release (Associated Builders and Contractors): https://abc.org/News-Media/News-Releases/entryid/17880/monthly-construction-input-prices-rise-in-june-says-abc

Old_Joe

That's all very well at the producer level. Does anyone really think that the natural gas costs for their homes has gone down by one third in the last year? Certainly not here in PG&E-land.

davidrmoran

>> The way it's currently done

Posted inflation data are chronically 4y out of date? That seems the conclusion, but I wonder; you'd think that would be bruited everywhere all the time.

msf

The cost of the residential natural gas itself has gone down from 29¢ per therm (July 2019) to 24¢ per therm (July 2020). Not a down a third, just down a sixth.

Cost of gas to your home is a total cost. That depends on how much gas you use, which varies year by year, and also on the cost of the last mile transport to your home. The latter is around 4x-6x times the cost of the gas itself. So that's the real determinant of cost, and a pretty stable one. I would guess that it is not a cost factor incurred by commercial users.

Still, looking at average total residential gas costs, they dropped by about 7% over the same one year period, from $24.03 to $22.32. (That's attributable almost entirely to slightly less use per household.)
https://www.pge.com/tariffs/Residential.pdf

hank

@msf - Sorry I missed the humor. Thought maybe you were packing for a trip abroad. And good luck dealing with the mandatory quarantine - likely in both directions.

msf

davidrmoran said:

>> The way it's currently done

Posted inflation data are chronically 4y out of date? That seems the conclusion, but I wonder; you'd think that would be bruited everywhere all the time.

I think what it's saying is that while the 2016 CPI is computed using 2016 prices, the weights in the 2016 basket are based on consumer surveys asking what people spent money on in 2013. (And 2017 CPI is based on 2014 weights.)

davidrmoran

dig it, that has to be the explan

needs a touch of clarifying editing, perhaps, says the ed

davidrmoran

msf said:

davidrmoran said:

>> The way it's currently done

Posted inflation data are chronically 4y out of date? That seems the conclusion, but I wonder; you'd think that would be bruited everywhere all the time.

I think what it's saying is that while the 2016 CPI is computed using 2016 prices, the weights in the 2016 basket are based on consumer surveys asking what people spent money on in 2013. (And 2017 CPI is based on 2014 weights.)

relative of mine formerly at one of the noncoastal federal reserves recalls that "2019 data get reported in Q1 2020. ... the various inflation indices used by FOMC are updated monthly, then revised up or down as more data become available."