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Keynote speakers confirmed
Nicholas Steele, Deputy Director, Office of Debt Management, US Department of the Treasury
James Bullard, President and Chief Executive Officer, Federal Reserve Bank of St Louis
Inflation is back! And it is returning with a vengeance. According to the US Department of Commerce, annual headline inflation hit 2.1%, surprising the market with a higher rate than expected for the second month in a row. Rising inflation is a sign of a strengthening economy - which is surely a positive thing - so why is there cause for concern?
The rise in inflation has been attributed to a number of factors, firstly being President Trump’s US tax overhaul – cutting corporate and personal income tax rates which in turn is sparking an increase in consumer spending. Secondly, rising commodity prices are adding fuel to the fire. And finally, the weakening of the US dollar.
These higher than expected figures are leading to expectations that the Fed will tighten monetary policy much more quickly than first thought. In 2017 the Fed raised rates three times, and we expect more rises in 2018 under the order of the new Fed Chair, Jerome Powell.
Markets are nervous, but volatility is remaining low. With long dormant inflation on the rise and the changes in the way the Bureau of Labor Statistics measures data, investors are likely to see this change. Is it a sign of the economy going crazy? Or just a case of signal vs noise?
Nevertheless, it is important investors protect themselves from the risk of inflation. TIPS and inflation-linked bonds issued by sovereign governments such as the US and the UK are indexed to inflation, and therefore interest rate payments follow the rise and fall. Approaches can vary depending on an investor’s tolerance to volatility, providing favourable diversification for investors.
Whilst markets are still relatively calm, it is important to think long term. If CPI growth keeps driving the break-even rate higher, it could be a sign that the market is taking action. So, how will you hedge against the risk of rising inflation in 2018?
On Wednesday 5 September, Euromoney Conferences will be back in New York for the annual Real Return Inflation-Linked Products Conference to discuss the US economy, global inflationary expectations, TIPS and the alternatives, inflation protection, and much more.