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ETFs to Benefit from Rising Inflation

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Finally, U.S. consumer prices rebounded and hit a three-month high in August. Consumer prices in the United States rose 1.9% year over year in August 2017, ahead of July’s 1.7% increase and market expectations of 1.8%.

The monthly rate rose to 0.4%, the highest since January and above forecasts of 0.3%. Barring, food and energy, consumer prices grew 0.2%. With this, August inflation data snapped the five-month long weaker-than-expected readings.

The latest uptick in consumer price inflation was backed by rising shelter and gasoline cost as Hurricane Harvey closed refineries along the Gulf coast, which in turn pushed up gasoline prices meaningfully. The energy index jumped 2.8% on a 6.3% increase in the gasoline index. The shelter index crawled up 0.5% in August with the rent index increasing 0.4% (read: Gasoline ETF Jumps on Storm Harvey).

Will the Fed Be Hawkish Now?

The yield on 10-year benchmark U.S. Treasury was 2.20% on Sep 14, the same as the day before. However, since subdued inflation has been keeping the Fed from being too aggressive on the policy tightening, such data prior to the Fed policy meeting will be seen as crucial.

As per Financial Times, the markets have already baked in a higher chance of a December rate hike following the release of inflation data. The chances have now risen to 50.9% from 41.3%, according to CME data.

As per Bloomberg, though CPI data is collected all through the month, the impact of Hurricane Harvey hit in late August should be moderate. But what’s important is that the impact of Harvey and Irma will be felt in the ensuing months’ inflation readings.

AccuWeather estimated Harvey and Irma to cost the economy about $290 billion. So, an uptick in activity, rebuilding and damaged-related purchases should be higher ahead, which in turn will likely perk up inflation.

Economists thus believe a consistent improvement in inflation, though hurricane-induced, may lead the Fed to strike in December. Plus, a subdued dollar and a rebound global economy would be positives for inflation.

Party Time for TIPS ETFs?

TIPS offers robust real returns during inflationary periods, unlike its unprotected peers in the fixed-income world. These securities pay an interest on an inflated-principal amount (principal rises with inflation) and when the securities mature, investors get either the inflation-adjusted principal or the original principal, whichever is greater. As a result, both principal amount and interest payments will keep on rising with increasing consumer prices (read: Forget Inflation Fears with These TIPS ETFs).

In this regard, investors should take note of TIPS ETFs including iShares TIPS Bond ETF (TIP - Free Report) ,  FlexShares iBoxx 5-Year Target Duration TIPS Index Fund (TDTF - Free Report) , FlexShares iBoxx 3-Year Target Duration TIPS Index Fund (TDTT - Free Report) and SPDR Barclays 1-10 Year TIPS ETF (TIPX - Free Report) .

What About Gold ETFs?

Gold is commonly viewed as an inflation-protected asset. So, if the greenback remains low and geo-political risks stay strong thanks to North Korea’s missile launches, an increase in inflation can go in favor of gold investing. SPDR Gold Shares (GLD - Free Report) was up about 0.4% on Sep 14, 2017 (read: What Lies Ahead for Gold ETFs?).

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