Inflation, or the apparent lack, has been a hot topic over the last several months as the Federal Reserve boosts interest rates from near-zero. The Federal Open Market Committee’s July meeting minutes showed policy makers were divided over whether to be cautious over recent weakness in inflation or to move back to a more normal state of monetary policy, which includes raising interest rates and cutting the Federal Reserve’s balance sheet.
The current data seems to support the notion that inflation is absent from the current economic expansion. The Fed’s favored inflation gauge, the Core PCE Price Index, stood at a 1.5% annual rate in June. The Consumer Price Index (CPI) was also short of the Fed’s 2.0% target, at 1.7%.
In other areas of the economy, inflation is showing itself. Last week’s existing home sales data for July showed that the median home price (for all types of existing homes) in the U.S. was up 6.2% year-to-year. New home sales data for July showed a 6.3% increase in the median price of a new home year-to-year. The data for July existing home sales marked the 65th consecutive month of year-to-year gains, according to Seeking Alpha, and this July’s new home sales showed the highest price for the month in history. Last December’s data showed the highest median price in any month’s history.
Most economists believe that inflation will rise as the job market continues to tighten and we near full employment.
As we know, when prices rise for energy, food and other goods and services, the entire economy is affected. Inflation impacts the cost of living, the cost of doing business, borrowing money, mortgages, corporate and government bond yields and every other facet of the economy.
AAII Weekly Survey Question
To get an idea of how our readers view the threat of inflation, we posed the following weekly survey question to them:
How worried are you about the prospects of rising inflation?
Here are the results:
In all, 1,637 readers responded.
There is an even split between those with some level of apprehension over the possibility of rising inflation and those who are not worried about rising inflation.
Fifty-percent of respondents say that are not worried at all about the prospects of rising inflation. Among the other half, 88% are only somewhat worried about rising inflation while 10% are very worried. Lastly, less than 1% of those worried about the prospects of rising inflation are “panicked.”
Weekly Special Question
Following up on our weekly survey, we then asked this open-ended question:
Given your answer to this week’s reader question regarding how worried you are about the prospects of rising inflation, what steps have you taken to protect your investments and finances?
We received 187 responses to this question.
Generally speaking, the responses fell into three broad categories:
- Becoming more aggressive in their portfolio
- Standing pat or waiting-and-seeing
- Becoming defensive in their investments
The biggest collection of responses clustered around becoming more “defensive” in their portfolio, at roughly 44%. This biggest number of responses in this category—by nearly two-to-one—dealt with boosting their diversification. Farther back, but receiving a similar number of responses were: 1) holding more cash, 2) buying Treasury Inflation Protected Securities or TIPS and 3) increasing their holdings in floating rate investments.
Only two readers in the “defensive” category said they are selling their stock positions along with two who said they are investing in gold or precious metals.
The second-biggest category of responses was related to becoming more “aggressive” in light of their views on inflation at nearly 37%. Here, the biggest group said they are avoiding bonds, followed closely by those who say they are increasing their stock exposure. Other responses in this category include:
- Buying real estate
- Increasing growth-oriented holdings
- Trading options
- Investing in foreign stocks
Lastly, the final group of responses—at nearly 19%—said they are standing pat or waiting to see what comes to pass. Interestingly, a number of readers offered up their thoughts on what worries them more than rising inflation. These responses include:
- The nation debt
Here is a sampling of the responses to the special question:
- “I have a diversified portfolio as well as my pension. I hold enough cash to cover my daily expenses.”
- “I extended my mortgage rate over a longer time period and avoid bond funds, small-caps and speculative stocks. I would also increase my allocation to real estate and commodities.”
- “I have been increasing my floating-rate closed-end funds and floating-rate preferred stock positions.”
- “Going into cash a little more than previously.”
- “I continue to invest in equities with an eye to both growth and value. I’m not taking any special measures against inflation (i.e., I’m not investing in TIPS).”
- “I have cut my expenses.”
- “Just ‘stay the course.’ Actually, policies in Washington, DC, might cause an increase in inflation. Without Washington, I really wouldn’t [worry] at this time about inflation at all.”
- “Paying off debt. Investing in stable stocks with sustainable dividends. Long-term stock investor.”
- “Bond ladder: Higher inflation will lead to higher interest rates and I will at least get back my principal.”
- “I’m retired and don’t know what to do. I’m debt-free and own my home. With my investments, I’m 90% in cash because I feel the stock market is due for a 5% to 7% correction.”
Everybody has an opinion! Why not give us yours? Participate in our weekly member poll, updated every Monday, and see the results online at http://www.aaii.com/memberquestion.