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Is Inflation Only 2%? No It’s A Lot Higher

My latest for the Philly Inquirer:

The real inflation rate can guide investments

©iStockphoto.com / NICK BAKER
©iStockphoto.com / NICK BAKER
POSTED: Tuesday, March 19, 2013, 6:47 AM

We all shop for food, put gas in our cars, pay for medication and doctor’s visits, day care and college – and, based on those prices, inflation has got to be higher than what the government says. The Consumer Price Indicator registered a puny 1.7 percent in 2012, according to official figures.

Real inflation is in fact higher than that, according to the American Institute for Economic Research’s (AIER) Everyday Price Index, which in 2012 revealed almost 8 percent inflation (www.aier.org/epi), much higher than the official CPI. In January 2013, the EPI’s increase came in at 6 percent annualized. A closer look at the EPI suggests that underlying inflationary pressures may be building.

Investors such as Luke Rahbari, chief investment officer of Stutland Volatility Group, are trying to ride inflation in their portfolios.

“We tell our clients to invest in things we use every day and capture that price inflation,” Rahbari said. He mentions companies selling or trading in gasoline and heating oil, electricity, or education.

For instance, Rahbari buys and sells in and out of United States Gasoline Fund L.P. (symbol: UGA) depending on the direction of gasoline prices. He does much the same with consumer goods companies such as Procter & Gamble (PG) and Johnson & Johnson (JNJ), and Google (GOOG), with the search engine profiting from rising advertising prices. (Warning on UGA, however: The fund is volatile and expensive for retail investors to trade.)

AIER’s Everyday Price Index (EPI) methodology measures the changing prices of frequently purchased items like food and utilities. AIER calculates the EPI by selecting the prices of goods and services from the thousands collected monthly by the Bureau of Labor Statistics in computing the Consumer Price Index. The EPI basket contains only prices of goods and services that Americans typically buy at least once a month, excluding contractually fixed purchases such as mortgages. Staff economists weigh each EPI category in proportion to its share of Americans’ average monthly expenditures.

Fixed-income warning

Guy LeBas at Janney Montgomery Scott in Philadelphia pointed out useful research reports to us that are available on the firm’s website. They advise clients how their bond portfolios could be affected by rising interest rates. The reports can be found at www.janney.com.

“Most investors understand that bonds are sensitive to interest rates, and that this relationship is inverse,” LeBas said, “but they don’t often know why or how.” Janney’s reports explain the math behind a turn in interest rates, which could hit prices of bonds.

Emerging markets

Did you know that what we think of as emerging markets now produce more than 50 percent of the world’s stuff, or what we call GDP in America? Developed nations like those in the European Union and the United States now produce just under 50 percent of global GDP. China, for instance, is now the world’s largest car market.

Chris Millard, investment specialist at JPMorgan Private Bank in Philadelphia, is encouraging clients to consider shifting asset allocations toward emerging markets, especially Chinese equities, and local currency debt in Latin America and Asia (except Japan). The price-to-earnings ratio of these markets is 12.5 times this year’s forward earnings. Corporate earnings growth in the United States likely will come in around 8 percent this year, vs. 15 percent corporate earnings in emerging markets, Millard says.


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