While U.S. inflation remains at historic lows, it has ticked up recently, leaving many investors fearing that it’s time to prepare portfolios for rising prices.

Some fears are primal. For investors, particularly those old enough to remember “The Great Inflation” of the 1970s and early 1980s, inflation is one of them. This fear is reinforced by the widespread perception among market watchers that six years of extraordinary monetary stimulus will inevitably lead to inflation.

As I’ve expressed in the past, given the United States’ unresolved fiscal issues, still excessive non-financial debt, and uncertain path toward monetary normalization, fearing inflation isn’t irrational. However, as of today, it may still be premature.

Recent readings have shown that inflation has stabilized, which is a good thing, but signs of an imminent acceleration in inflation are still scant. In other words, it’s probably too early to restructure a portfolio around a big shift in the inflation outlook. Consider these four facts.

Consumer inflation is still historically low. While it’s true that inflation has risen from last year’s lows – the consumer price index (CPI) has doubled over the past 7 months – the rise needs to be placed in context. Both the CPI and producer price index (PPI) have only reverted back to their three-year average.

Other measures of inflation look more benign. Core PPI is at 1.8%, its post-recession average. More importantly, the core personal consumption expenditure (core PCE), the Fed’s preferred measure of inflation, is at 1.5%, still well below the Fed’s target of 2%.

Inflation expectations remain stable. Both the University of Michigan’s 1- and 5-year measures of inflation expectations are at, or below, the middle of their respective 3-year range. Ten-year inflation expectations from the Treasury Inflation-Protected Securities (TIPS) market remain stable at roughly 2.25%.

Wage inflation remains subdued. Much of the recent anxiety about inflation has focused on two areas: housing and the labor market. On the former, there is some evidence of housing inflation. The Owner Equivalent Rent (the Labor Department’s measure of housing inflation) is at 2.6%, the highest level since the summer of 2008. I believe this reflects a rebound in housing and a growing willingness to rent. However, evidence of wage inflation is more difficult to come by. While most measures of wages have accelerated from last year’s lows, they remain subdued. Hourly wages are rising at 2% year-over-year, consistent with the subdued pace we’ve witnessed since the recession ended. A more complete measure of wages – the Employment Cost Index (ECI) – is growing at 1.8% year-over-year, right in the middle of its post-recession range.

Without more tangible evidence of a pickup in wages, I’d avoid restructuring a portfolio around expectations of imminent inflation. That said, over the long term, investors should be concerned about preserving purchasing power. Unfortunately, some of the traditional inflation hedges are expensive, despite the dearth of imminent inflation signs.

For example, TIPS are barely providing a positive real yield, even before taking taxes into account. And as I recently discussed, while gold and silver both have a place in a portfolio, the potential for rising real-rates calls into question whether now is the right time to add to precious metal positions.

Instead, I’d look to equities to provide a long-term hedge against an eventual pickup in inflation. In particular, I continue to like energy stocks. Despite outperforming year-to-date, the energy sector is one of the few segments of the market that still appears inexpensive. Finally, the sector has an additional benefit: In the past, energy stocks have been one of the better performers when inflation is rising.

Sources: BlackRock, Bloomberg, Citi Investment Research

Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses which may be obtained by visiting the iShares ETF prospectus page. Read the prospectus carefully before investing.

Investing involves risk, including possible loss of principal.

Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments.

An investment in iShares Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency and its return and yield will fluctuate with market conditions.

The Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).

©2014 BlackRock. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock. All other marks are the property of their respective owners.

Investopedia and BlackRock have or may have had an advertising relationship, either directly or indirectly. This post is not paid for or sponsored by BlackRock, and is separate from any advertising partnership that may exist between the companies. The views reflected within are solely those of BlackRock and their Authors.

?feed-stats-post-id=19180

Related Articles
  1. Economics

    The Delicate Dance of Inflation and GDP

    Investors must understand inflation and gross domestic product, or GDP, well enough to make decisions without becoming buried in data.
  2. Economics

    Will Silver Recover in 2016? (SLV, GLD, JJC)

    The end of the silver downtrend is likely to coincide with similar recoveries in gold, iron and copper.
  3. Forex

    The Consumer Price Index

    Find out how this economic measure can help you make key financial decisions.
  4. Economics

    How Interest Rates Affect The U.S. Markets

    When indicators rise more than 3% a year, the Fed raises the federal funds rate to keep inflation under control.
  5. Economics

    3 Things That May Happen at FOMC Meeting

    We are keeping a close eye on what the Fed will say about economic outcomes and participants’ viewpoints at the FOMC meeting this week.
  6. Economics

    3 Economic Challenges Russia Faces in 2016

    Learn about the three largest challenges facing the Russian economy in 2016. How will low oil prices and high inflation impact the Russian economy?
  7. Term

    Why Countries Keep Reserve Currency

    Central banks and financial institutions hold large amounts of foreign money as their reserve currency.
  8. Investing

    Index Funds Explained

    Indexing strategies have been around for long, but many investors still don’t understand what a powerful tool they can be when constructing a portfolio.
  9. Economics

    4 Economic Challenges South Korea Faces in 2016

    Learn about the economic challenges South Korea faces in 2016. Discover the impacts of currency fluctuations, the Chinese economy and Fed rate cuts.
  10. Economics

    3 Economic Challenges Argentina Faces in 2016

    Learn about three challenges that the Argentine economy faces. How will President Macri manage capital controls, investor sentiment and fiscal deficit?
RELATED FAQS
  1. How does a cost-of-living adjustment (COLA) affect my salary?

    Some companies build salary adjustments into their compensation structures to offset the effects of inflation on their employees. ... Read Full Answer >>
  2. Are Canadian Pension Plans inflation-protected?

    The Canada Pension Plan protects pension holdings against inflation and adjusts its annual rates for inflation. The Canada ... Read Full Answer >>
  3. When is the best time to invest in inflation-protected securities?

    Investment timing decisions are among the most challenging faced by investors as they have a significant impact on ultimate ... Read Full Answer >>
  4. Should I include inflation-protected securities in my 401(k)?

    One of the most significant challenges faced by 401(k) account owners is the creation of an investment plan that can withstand ... Read Full Answer >>
  5. Is Social Security inflation-protected?

    Social Security benefits are inflation-protected. Social Security was created in 1935, and taxes were collected for the first ... Read Full Answer >>
  6. Why isn't the cost-of-living adjustment mandatory?

    A cost-of-living adjustment, or COLA, is a purchasing power protection mechanism provided to all monthly Social Security ... Read Full Answer >>
Hot Definitions
  1. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  2. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  3. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  4. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  5. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
Trading Center