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Portfolio > Economy & Markets > Economic Trends

What's Next for Investors as Inflation Sticks Around

By Dinah Wisenberg Brin

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What You Need to Know

  • Investors should consider hedging against inflation and think about how extended elevated interest rates might affect their portfolios, says one strategist.
  • Deflationary pressures in goods may be abating, Jefferies analysts wrote.
  • A Senior Citizens League survey finds concern among retirees.

Consumer price data for January suggests inflation may be more stubborn than expected, although it continues to moderate year over year, market analysts said after the government released the latest figures Tuesday.

Investors should consider continuing to seek ways to hedge against inflation, given its persistence, a top BlackRock strategist wrote.

The Consumer Price Index showed year-over-year inflation slowed to 6.4% from 6.5% in December — higher than the consensus view but marking the seventh straight year-over-year decline, BlackRock’s Gargi Chaudhuri, head of iShares Investment Strategy, Americas, noted.

The index increased 0.5% on a monthly basis, in line with expectations, after January’s unexpected 0.1% decrease, she added. Core inflation, which excludes food and energy, softened to 5.5% year over year from 5.7% in December, while the monthly number was 0.4% higher, compared with a 0.3% increase in December.

Moderating, but Stubborn

“This inflation print served as a reminder to investors that the path to lower inflation is not as clear-cut as previously thought and it is too early for the Fed to declare victory on inflation,” Chaudhuri wrote. “While the economy has experienced meaningful cooling in prices recently, the tight labor market and continued growth in wages also remind us that many pockets of the economy are still strong.”

She and others cited price growth in services as a key factor in persistent inflation.

“We believe inflation will continue to remain stubbornly high for the rest of 2023 but will moderate to around 3.5% by the end of the year, above the Fed’s 2% target,” Chaudhuri said. “While we can safely say that we are past peak inflation, it is too early to call victory on the battle against higher inflation.”

Investors should continue to consider hedging against inflation and think about how extended elevated interest rates might affect their portfolios, she added.

“We have conviction towards inflation-linked bonds over nominal bonds. For other ways to potentially hedge inflation, we like infrastructure stocks. Infrastructure owners could benefit from increased infrastructure spending on the back of the Infrastructure and Jobs Act,” the BlackRock strategist added.

In a high-interest-rate environment, investors can find attractive fixed income yields across the curve, such as allocations to the short end of Treasury markets and the front end of investment-grade credit, she said. In equities, BlackRock prefers value-style exposures.

Services, Housing Inflation Persist

Vanguard senior economist Andrew Patterson said Tuesday’s CPI report “highlights the work left to be done by the Fed. While inflation is heading in the right direction, there is a long and bumpy road ahead to price stability.”

While goods disinflation continues, “the pace has been less rapid than we anticipated and may fade going forward as goods prices such as those for automobiles normalize,” Patterson wrote.  “Service price growth remains elevated, though less so when accounting for the likely fall in shelter prices coming in the latter part of the year.”

The report doesn’t change Vanguard’s views on macro fundamentals or Fed policy, but highlights the need to remain data-dependent and focused on the nuance in data releases as well as the headline numbers, he said.

Analysts with Jefferies Financial Group said the Bureau of Labor Statistics report indicated no signs of easing in service or housing inflation and agree that deflationary pressures in goods seem to be abating.

While monthly CPI increased in line with consensus, with core inflation up 0.4%, a look “under the hood” showed upside surprises, the Jefferies team wrote. Core goods increased by 0.1% month to month, the first positive move since September. “That’s despite the fact that used car prices were down 1.9% (month to month). Outside of used cars, core goods inflation seem to be inflecting higher.”

In addition, used car prices and airfares are unlikely to keep declining, the Jefferies analysts wrote.

Seniors Wary

Meanwhile, a new survey from The Senior Citizens League, an advocacy group, suggests 54% of older consumers worry their 8.7% Social Security cost-of-living adjustment for 2023 won’t keep pace with inflation. About the same percentage reported their 2022 household costs rose by more than 8.7%, the group said Tuesday.

A new analysis by Mary Johnson, the senior league’s Social Security and Medicare policy analyst, indicates that from the start of the COVID-19 pandemic in 2020 through December 2022, Social Security benefits fell short of COLAs by about $1,054 on average. And that’s before the deduction for Medicare Part B premiums.

The moderation of inflation just announced would shrink the shortfall on average by about $40.34 per month for January and February before a $164.90 deduction for the monthly Medicare Part B premium, the league said.

The survey also found that over half of respondents worry they’ll pay more taxes this year because of the 5.9% COLA received in 2022.

(Image: Adobe)

Dinah Wisenberg Brin

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