We’re all relieved that we can now earn a lot more than zero in our savings accounts, money market funds, and CDs. Even with that, there’s widespread fear that the inflation genie is out of the bottle. We think differently about that. Here’s why.
In the 20-year chart from Yardeni Research, below, the blue line is the bond market’s expectation for future
inflation. For the entire 20 years, those expectations have tracked in the
1%-3% range.
But everyone knows that actual inflation fluctuates dramatically. The red line shows actual inflation, measured by the CPI (Consumer Price Index). It’s almost always different from expectations.
Our view: We regard expectations (the blue line) to be inflation’s center of gravity. We expect actual inflation (the red line) to fluctuate around that center. Our question is always, “Where is inflation in relation to the center?”
The answer leads to two rules:
2. When inflation (the red line) is below the center, cash, savings accounts, money market funds, CDs, US Treasury securities, and bond funds are less productive.
Notice that there’s no attempt to forecast, guess, or worry about how inflation will move. No dramatic changes need be made to a portfolio’s overall asset allocation. We trim sails to use what the markets give us.
In the meantime, the most important thing is your situation and objectives. We’re here to have the necessary conversations about that and set a strategy that works for you.
James Cosgrove, CFP, Plano, TX jim.cosgrove@verizon.net 972-489-0262
Jim Cosgrove, Partner, San Jose, CA jimcos42@gmail.com 408-674-6315
Evidence-based. Rules-driven. Policy-focused.
