Market Beat: Falling interest rates and inflation
June 2, 2014
As we approach the half-way point of the year, one interesting trend so far in 2014 has been the drop in interest rates. The 10-year Treasury bond started the year yielding about 3 percent and that yield has since declined to just fewer than 2.5 percent today.
Low interest rates can be good for the economy, but can make things very difficult for retirees who invest for income as a primary goal.
Ten-year Treasury yields hit a historic 200-plus-year low back in 2012 when they were paying about 1.45 percent; yields rose from there to about 3 percent before reversing this year.
Jeffrey Gundlach of the Doubleline funds thinks there is about a 30 percent chance that the 10-year bond will retest its record-low yields seen in 2012.
The low interest rate environment is challenging for investors who want to invest conservatively, but still produce an adequate income stream. That shouldn't be much of a problem as long your savings are adequate and inflation remains tame.
According to the Bureau of Labor Statistics, the CPI (consumer price index) increased by 2.0 percent over the last year; 2.0 percent is not a bad rate of inflation and is right about where the Fed wants it to be.
The 2.0 percent number is for all items that they evaluate, but there were signs of price inflation in some specific areas. For example the report showed that utility service for piped gas increased by 11.8 percent.
The way the CPI is calculated has evolved over the years partly because people consume different products today than they did thirty years ago. However, if the CPI was constructed in the same way today that it was in 1980, we would be seeing some real inflation.
According to John Williams of ShadowStats, if the same methodology were still in use today, we would have seen an inflation rate of 8.9 percent in 2010, 10.7 percent in 2011, 9.7 percent in 2012 and 9.1 percent in 2013.
Investors need to keep pace with inflation just to maintain their purchasing power over time. Retirees who need cash flow have to be cognizant of the risks involved with any investments that provide a high yield.
Middle-class Americans are suffering from wage stagnation because inflation measures are biased to the downside and the cost of living increases are inadequate to maintain the purchasing power of the wage earners.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.