This post was originally published on this site
If you’re retired, you don’t need to be told that prices are rising faster than you can keep up. The Social Security Administration has increased the size of your monthly checks this year by 5.9% to adjust for the rising cost of living, but that’s already too little. The official inflation rate is already up to 7.5%. And energy prices are even worse. Household electricity is up 11%, natural gas 24%, and gasoline for your car a stunning 40% in a year.
I ran some quick back of the envelope numbers based on government data on the average household budget among the over 65s, and just these energy costs alone will cost the typical retired household about $750 extra per year.
And that was before the crisis in the Ukraine, which has sent gasoline prices spiraling up another 20 cents a gallon in the last month. The international OPEC oil cartel says they aren’t increasing production just yet.
Inflation is even worse for retirees than it is for everybody else. If you’re living on a fixed income, such as an annuity, rising prices in the stores simply eats away at your purchasing power. And once we’re over 65 we’re generally advised to keep much of our savings in bonds rather than more volatile stocks: And bonds get pounded by inflation, because in most cases the interest payments don’t rise to keep up. Between 1965 to 1981, people who kept their money in bonds earned less than the rate of inflation in 14 years out of 17.
But amid all this gloom, I come bearing some (modest) good news.
Inflation may be peaking, and may soon be on the way back down. And despite the current surge in oil and gasoline prices, they, too, may soon be falling.
This isn’t me talking. It’s the markets themselves.
There’s a “market” for inflation expectations, as I have previously touched on. That’s based on the relative interest rates offered by bonds that have no inflation and bonds that do. And right now that market is showing that inflation expectations peaked last November, and have been coming down ever since.
Right now it’s predicting an average inflation rate of 2.86% over the next 5 years, compared to a prediction of nearly 3.2% a few months ago. Compare that to today’s 7.5% rate.
Is this prediction right? Who knows? I don’t — nor does anybody else. Tune out the yakkers on TV and the pyjamahadeen online. If they really knew this forecast was wrong, they wouldn’t be talking about it. They’d be trading on their extraordinary wisdom, and preparing to buy a new yacht even bigger than Jeff Bezos’.
They’re not doing that because they don’t actually know. But this prediction — that inflation will fall, and be below 3% for the next five years — is the best one available. Nothing else comes close.
And it’s much the same with energy prices. Right now crude oil is about $93 a barrel — nearly 50% more than it was this time last year. And, of course, when oil prices are up this high there are always people around who want to give you a good scare on TV by telling you they’re going to $100, or $150, or $200.
Who knows? Maybe they even will. But that’s not what the oil markets are saying,
The futures market for crude oil thinks oil prices have peaked. The futures price for June is down to $89, for September it’s $85, and for April next year it’s below $80.
Are these forecasts right? Once again: Who knows? But they are the best ones available.
Maybe the Russian crisis will get worse. Maybe it won’t. Maybe OPEC will raise production if it does. Nobody knows.
Those doomsayers you hear: If they really knew that oil was going to be north of $100 soon, they wouldn’t be wasting time going on TV to tell you. They’ve be buying up these futures with both arms. (Actually, they’d be buying options to give themselves leverage, and doing it with borrowing money to boot). And, once again, they’d be preparing to buy control of, say, Apple
AAPL,
with their future trillions.
They’re not doing that, because they don’t know. Talk is cheap.
Meanwhile, the risks of inflation are why sensible money managers advise retirees to hold some of their retirement portfolio in TIPS, or Treasury Inflation-Protected Securities, a form of U.S. Treasury bond that adjusts your interest rate to take account of rising (or falling) prices. They may also include limited exposure to some other assets that give you inflation protection, such as commodities and real estate. Alaska’s highly successful state investment fund, for example, allocates 10% of its money to TIPS and 10% to REITs, alongside a 20% allocation to regular bonds and 60% to stocks.
Over the past 12 months, and so far this year, commodities have been the best protection. While the iShares TIPS Bond ETF
TIP,
has earned you just 3% in a year, and the Vanguard REIT ETF
VNQ,
17%, the Invesco DB Commodity Index Tracking Fund
DBC,
has risen 39%. So far in 2022, the commodity fund is the only one in positive territory. Over the long term, though, commodities can be an expensive insurance policy: They are very volatile, and end up having a negative real return.
Bottom line, though, is that while we should all have some inflation protection, especially in retirement, the markets are currently saying we are past the worst. If you are absolutely convinced they are wrong, please don’t write in – just go and bet against them, and let us know when you’re a trillionaire.
