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Joe Boyle (Photo: Hartford Funds)

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Joe Boyle: Commodities and TIPS Can't Smooth Inflation Away

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What You Need to Know

  • Joe Boyle says inflation trackers should take food and energy costs seriously.
  • He warns that some inflation-fighting strategies could be dangerous.
  • He wishes he had a port-watcher in San Diego.

Inflation is back, and many younger investors are trying to wrap their brains around the idea that prices could keep going up.

Hartford Funds recently described their views about the archenemy of retirement savings in a summary of results from a survey of 908 U.S. investors conducted in February, Russia invaded Ukraine. The survey participants had at least $75,000 in investable assets.

About 94% of the participants said inflation is an area of concern, but Hartford found a big split between results for participants ages 42 and older and younger participants.

Only 47% of the older participants agreed that the Federal Reserve Board’s new efforts to push up interest rates will get prices under control. About 71% of the younger participants predicted that Fed intervention would work.

Hartford also found that younger survey participants were much more likely to see investments in stock and real estate as good defenses against inflation.

Joe Boyle, the fixed income product manager at Hartford Funds, is helping the asset manager navigate through the new, unfamiliar seas.

Via email, we asked Boyle questions about how he sees inflation, and investors’ response to inflation.

1. How do you define inflation? Do investors know what it is?

Technically, inflation is the rate of increase in prices of goods and services over a given period.

However, up until recently, the increases have been benign and even decreasing in some instances, driven by several factors, such as technology.

With inflation at levels not seen since the early 1980s, this phenomenon is a new experience for many in the younger generations.

This, in part, may be why they can’t define it: Our recent research found that 46% of younger investors could not accurately define the term.

A simple example would be flat screen TVs. They are a fraction of what they cost originally, and everyone has one. Cell phones also fall in that category.

Twenty years ago, they were a couple hundred dollars, non-essential, and didn’t have nearly the technology of today.

Now, they might be a little more expensive, but they are completely essential, and the technology gets better and better.

Historically, inflation has been immaterial for quite some time, and any spikes in food and gas have been somewhat short-lived; the last time the east coast saw gas over $4 that we can recall was in 2005, following the devastating effects of Hurricane Katrina, during which oil was spiking.

2. What kinds of inflation definitions and benchmark statistics interest you, and why?

We pay particularly close attention to 1. food and 2. energy, even though it is standard to take them out of the inflationary measures because of the volatility that exists.

But, at the same time, who doesn’t need to eat? Who doesn’t need gas to drive to work and take care of other day-to-day errands? Who doesn’t need to heat their home?

Which transportation company doesn’t need to fuel their trucks?

Shocks to these basics is what makes people pay attention.

We understand that there is a constant demand component that plays into the smoothing of inflation, but the constant and consistent demand is why it’s so noticeable to the average person.

Additionally, we are paying particular attention to the wage-growth statistics, as they tend to be stickier, but lag.

The results seem mixed at the moment — wage growth is higher, but not as high as many would expect or hope given the cost of everything else.

3. Do you think all retail investors should be using the same inflation definitions or benchmarks the same way, or do you think it makes sense for clients to be conscious of different kinds of inflation benchmarks?

We think that retail investors should always revisit their goals, objectives and constraints.

Commodities may very well set the standard for total return by the end of 2022, but a significant allocation is not appropriate for most investors due to the volatility in the asset class.

It’s traditionally a boom/bust asset class.

At the same time, a Treasury inflation-protected securities (TIPS) fund may be too conservative for younger generations, and the returns might even surprise them to the downside in an inflationary environment.

4. Have clients been expressing serious concerns about how inflation impacts their investments and personal finances?

Yes, we continue to hear concern from investors on how this inflationary environment impacts their investments.

According to our survey, 94% of investors said that inflation remains an area of concern for them.

Since a fair segment of investors have never dealt with this type of risk before, they are paying much closer attention to the impact of inflation.

However, many are asking about the opportunities as well.

Should they allocate more to a commodities-type strategy? Or should they shift some from fixed-income to equities, which historically fare better when inflation runs hot?

Many are also asking where in equities they can best take advantage of this situation, which brings us back to asking: What are your short- and long-term goals?

Somewhat leaning into inflation may help investors in the short run, but over the long haul, we would advise investors that it should not make up the bulk of their portfolio.

5. If you had a magic wand, what new inflation indicators would you have it create?

If we had a magic wand, we would have more people in San Diego counting the backlog of shipping vessels waiting to dock.

One of our colleagues in San Diego described what he was seeing with his own eyes a year ago, but it just seemed to be an anomaly. The reality is that it has been difficult to rely on traditional economic indicators.

It started with the COVID-19 pandemic, which really created a lot of noise. We all wanted to believe things would normalize quicker than they have.

US businesses are incentivized to solve problems like the supply chain disruptions we’ve experienced, but there have been a myriad of factors behind this that are uncontrollable, whether that is entire cities in China shutting down for days on end, extreme difficulty in hiring workers, or a decade of under-construction in housing.

Currently, we are living through the unfortunate situation in the Ukraine which most importantly is a humanitarian crisis, but it is also impacting the energy sector at the moment.

No one could have foreseen much of this coming by just looking at a backward looking metric.

We are living in a real-life puzzle, and I doubt that anyone could have visualized all the pieces fitting in the way they are today.

Joe Boyle (Photo: Hartford Funds)