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How will you know inflation's back?

Telltale TIPS
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Telltale TIPS

With inflation, it's a good tip to watch TIPS, or Treasury inflation-protected securities. TIPS are federal bonds. Their principal gets adjusted to reflect moves in the Consumer Price Index. If inflation rises, their face value is increased.

That may explain why TIPS have been selling at a premium to their face value -- investors expect inflation will prod the government to adjust the principal upward. "TIPS prices increase when there is the expectation of inflation, and decrease when that expectation is lessened," says Art Nunes, chief investment officer of Northwest Asset Management in Mercer Island, Wash.

Another bond to follow is the 10-year Treasury. Their rates have been rising -- and the prices of the bonds falling -- since last autumn. It suggests some traders expect inflation, at some point.

The bottom line: There isn't just one sign that will show inflation's back. And a lot of common wisdom can prove widely wrong, says Michael Argiro, owner of 4T Financial in Wallingford, Conn. "Don't follow the herd," he says. "You're likely to go off the cliff that way."


 

 

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