Inflation rates—a general increase in prices–are very low.  With Fed officials talking openly about low inflation and the risk of deflation, it is appropriate to examine inflation risk and how to address it.  High levels of inflation erode purchasing power and the value of stocks and bonds.

This week we review aspects of inflation.  The first article from the front page of the New York Times reports that economists, both inside and outside the Fed, are discussing inflation in favorable terms.  The next two articles discuss portfolio positioning when inflation is expected.

In Fed and Out, Many Now Think Inflation Helps.  Janet Yellen, President Obama’s nominee to lead the Fed starting next year, has argued, along with other economists, that a little inflation is particularly valuable when the economy is weak, according to the New York Times. “By one measure, inflation rose at an annual pace of 1.2 percent in August, just above the lowest pace on record.”  The Fed has tried since the financial crisis to keep prices rising about 2 percent a year.  “All this talk has promoted dismay among economists who see little benefit in inflation, and who warn that the Fed could lose control of prices as the economy recovers.”

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Rob Arnott, head of Research Affiliates, shares his firm’s market insights and allocation strategies.  Arnott notes that real economic recovery is a ways off, but the longer-term view of inflation risk is on the upside, and he offers an asset allocation solution.  “Mainstream stocks and bonds excel in a disinflationary world…those first two pillars need to be complemented by a ‘third pillar’—those that diversify away from mainstream stocks and bonds, provide higher yield, higher growth or both, and offer the potential for better returns in the face of rising inflation…alternative strategies are becoming more attractive over time.”

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Survival of the Fittest?  Bill Gross of Pimco offers his viewpoint that the Federal Reserve won’t be raising short-term rates until 2016 or beyond.  “Because of the inflationary intention of low policy rates

[emphasis added], TIPS (Treasury Inflation-Protected Securities) and the avoidance of anything compositely longer than say 7-10 years of maturity should be favored.”

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And in case you missed itclick here to read last week’s blog post which reviews economic lessons from the current and past budget stand-offs.

We hope you enjoy reading these articles along with us and that you find them informative.  Please forward this to your friends and family.


J. Mark Nickell & Co.


Disclosure – The articles mentioned in This Week with J. Mark Nickell & Co. are for information and educational purposes only. They represent a sample of the numerous articles that the firm reads each week to stay current on financial and economic topics. The articles are linked to websites separate from the J. Mark Nickell & Co. website. The opinions expressed in these articles are the opinions of the author and not J. Mark Nickell & Co. This is not an offer to buy or sell any security.  J. Mark Nickell & Co. is under no obligation to update any of the information in these articles. We cannot attest to the accuracy of the data in the articles.