2009 Inflation-Hedging Market Data:
§ $59 billion: the 2009 increase in the “inflation hedging” investment category (i.e., Gold, inflation-protected bonds, commodity funds and commodity exchange-traded fund)
§ ($52 billion): the 2009 decrease in U.S. stock funds and ETFs
Typical, Inflation-Hedging Investments:
§ Energy, Materials and Consumer Staples (food and tobacco) stocks
§ Companies with strong pricing power (Coke)
§ Some debt (e.g., High-yield debt, lower-rated investment grade bonds)
§ Short-term debt (that is less susceptible to the higher interest rates associated with inflation and permits re-investment at higher rates)
§ (0.2%): CPI (October 2009 year over year change)
Will Inflation Pick Up?
§ No. Since unemployment will remain high; unused capacity should facilitate economic growth without an increase in prices (i.e., inflation)
§ No. Stock and bond markets aren't pricing in a rise in inflation; TIPs pricing indicates inflation is expected to be less than 1% in 2010; 1.5% over the next 5 years; 2.1% over the next 10 years
§ Yes. There’s a huge amount of liquidity. And, when banks accelerate their lending practices again, inflation will rear its head
TIPs or I-Bonds?
Read some opinions here
TIPs or the S&P 500 Index:
According the chart below, the November 2009 YOY (11/30/08 – 11/30/09)results:
§ S&P 500: 25.3%
§ TIPs (Vanguard VIPSX): 19.3%
The Bottom Line: over the long-run, inflation increases; TIPs offer inflationary protection and could be a good addition to a well-diversified portfolio.
Source(s): WSJ, Vanguard.com, Morningstar.com