likely to prevail in the near term future.
Current economic data suggest that inflation is relatively tame, but prices are on the rise. In April, the Consumer Price Index, also known as the CPI, rose by 3.2 percent from a year earlier marking the fourth straight month of rising prices. Furthermore, these increases in prices had already emerged in the retail sector as rising prices of cotton, wheat, sugar, crude oil and other raw materials have forced companies like Starbucks (NASDAQ:SBUX), McDonalds (NYSE:MCD) and Levi Strauss to raise prices and pass the impact through to the consumer.
Another indicator that inflation is likely to prevail is the recent jump in the breakeven rate of five-year Treasury Inflation Protected Securities (TIPs), which are flirting with three year highs. The breakeven rate is the yield difference between TIPS and comparable maturity Treasuries and a good measure of the outlook for consumer prices over the life of the securities, in this case five years. As this rate increases, the likelihood of rising prices increases.
Lastly, the general perception of inflation expectations appears to be rising at the Federal Reserve. In fact, according to Caroline Salas and Scott Lanman of Bloomberg, expectations for annual consumer price gains have increased by more than 40% since the Fed began its second round of asset purchase in November. Despite this perception, the Fed continues to implement its stimulus policy-making by keeping short-term interest rate at or near zero, which could also add fuel to the inflation fire.
At the end of the day, although inflation is not prevailing, signs are starting to emerge. Some ways to protect against inflation include:
- iShares Barclays TIPS Bond Fund (NYSE:TIP), which is one of the most popular way to hedge against inflation. TIP is designed to generate a yield which adjusts to the CPI, meaning that as CPI rises, TIP’s yield rises and vice versa
- IndexIQ CPI Inflation Hedged ETF (NYSE:CPI), which aims to track an Index that seeks to generate a rate of return that is above inflation which is measured by the consumer price index
- PowerShares DB Agriculture Fund (NYSE:DBA) holds futures contracts in food based commodities such as corn, wheat, sugar and soybeans, which could witness price appreciation as inflation looms.
- US Oil Fund (NYSE:USO) which is a play on crude oil futures contracts. Historically speaking, crude oil appreciates in value during times of inflation, which would enable USO to reap the benefits.
- SPDR Gold Shares (NYSE:GLD)- traditionally gold has been the go-to investment to hedge against inflation and will likely to continue to witness appreciation in inflationary times.
Written By Kevin Grewal From ETF Tutor Disclosure: No Positions
Kevin Grewal is the founder, editor and publisher of ETF Tutor and serves as the editor at www.SmartStops.net, where he focuses on mitigating risk and implementing exit strategies to preserve equity. Additionally, he is the editor at The ETF Institute, which is the only independent organization providing financial professionals with certification, education, and training pertaining to exchange-traded funds (ETFs). Prior to this, Grewal was a quantitative analyst at a small hedge fund where he constructed portfolios dealing with stock lending, exchange-traded funds, arbitrage mechanisms and alternative investments. He is an expert at dealing with ETFs and holds a bachelor’s degree from the University of California along with a MBA from the California State University, Fullerton. He is a contributing author on The Street – his articles can also be found published on various sites including Yahoo! Finance, The Globe and Mail , Daily Markets, MSN Money, Seeking Alpha, Fidelity Investments, Traders Library, and Minyanville.