Consumer prices in the United States grew 2.1% year over year in January 2018, in line with December and above market expectations of 1.9%. Higher cost of food and medical care services led to the estimate beat. If we take food and energy prices off, annual inflation was flat at 1.8%, again exceeding expectations of 1.7%.
The monthly inflation rate was up 0.5% from 0.2% in December thanks to broad-based cost increases. The figure breached forecasts of 0.3%. The energy index jumped 3%, with the increase in the gasoline index more than compensating for declines in other energy component indexes. The food index grew 0.2% with both food at home and food away from home indexes rising. Barring food and energy, prices went up 0.3%.
Will the Fed be Hawkish Now?
The yield on 10-year benchmark U.S. Treasury jumped to about a four-year high of 2.91% on Feb 14, following the piping hot inflation data. However, since subdued inflation has been keeping the Fed from being too aggressive on policy tightening, such data prior to the Fed policy meeting in March will be seen as crucial.
Investors now believe the U.S. central bank will hike interest rates at least three times this year as forecast last year. Federal funds futures suggested that traders have already taken into account an 83% chance that the Fed will raise overnight bank borrowing costs by a quarter point to 1.50-1.75% at its March 20-21 policy meeting. The probability is up from 76% late Tuesday, CME Group’s FedWatch program showed.
Moreover, Fed funds futures indicated that traders see a 25% chance that the Fed would increase key overnight borrowing costs four times in 2018 compared with 17% late Tuesday, according to FedWatch. In early January, the Fed Funds market indicated that there was around a 10% probability of four interest rate increases this year.
A unit of BNY Mellon was quoted on Financial Times that “the bond market had been expecting upward pressure on interest rates, but we are getting that faster than the market had expected last year.”
Against this backdrop, below we highlight a few ETF ideas that could be intriguing in an inflationary environment.
FlexShares iBoxx 5Yr Target Dur TIPS ETF (TDTF - Free Report)
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 rising consumer prices(read: ETFs to Benefit from Rising Inflation).
SPDR Gold Shares (GLD - Free Report)
Gold is commonly viewed as an inflation-protected asset. An increase in inflation can favor gold investing. So, if the greenback remains low as the Trump administration wants to have a trade advantage from it, gold can gain ahead (read: A Tale of Two Currencies and The ETF Impact).
Sit Rising Rate ETF (RISE - Free Report)
The surprise uptick in inflation has made the market believe “that the Fed will hike interest rates more and for longer than expected.” This will simply result in a rising rate environment this year, benefiting the fund RISE.
CurrencyShares Japanese Yen ETF (FXY - Free Report)
Though the stock market digested the inflation threat on Feb 14, there could be a fresh selloff in the market. If that happens, edgy investors may bank on the safe-haven currency yen. In any case, the fund gained about 0.8% on the day the inflation report came in better-than-expected.
SPDR S&P Bank ETF (KBE - Free Report)
Since financial stocks benefit in a rising rate environment, investors can take a look at this bank ETF. The fund gained about 2.9% on Feb 14.
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