Experts at leading mutual-fund firm, Vanguard Group, believe that inflation is on the final stretch towards its targets of approximately 2%. However, it is unlikely that these targets will be reached until as late as 2025.
Mark Heppenstall, President and Chief Investment Officer at Penn Mutual Asset Management, overseeing $31.4 billion in assets as of May, observed that the market is uncertain as to the direction monetary policy will take from hereon. The next difficulty will be navigating the challenges of sticky, long-lasting inflation to reach the desired targets.
As a result of market uncertainty, investors are turning to high-quality fixed income to act as a stabilizing mechanism — due to its stable income and yield — providing a good place to park capital in uncertain times, especially when rates are elevated.
The Federal Reserve’s next major U.S. inflation report will arrive on Friday. Economists expect it to show that the personal-consumption expenditures price index’s narrower core reading fell in May to 0.3% on a monthly basis and 4.6% year-over-year. Regardless, core measures of the separate consumer-price index (CPI) have remained unchanged for three consecutive months at 0.4% and stand above 5% on a 12-month basis as of May.
Strong US Data Indicates Persistent Inflation
Recent data releases from the US suggest that the world’s largest economy may still be too strong to make any meaningful impact on inflation. May’s durable-goods orders and new-home sales, along with June’s consumer confidence, all surpassed expectations, creating a counterargument to concerns over inflation.
However, outside of North America, inflation has proven to be a more stubborn issue. Britain’s inflation rate remains at 8.7% as of May. While the eurozone’s inflation level has improved to 6.1%, prices of food and services have continued to increase at an uncomfortable pace. European Central Bank President Christine Lagarde remarked on Tuesday that inflation is still too high across the region and is set to persist for some time.
Deputy head of the International Monetary Fund, Gita Gopinath, echoed these concerns and warned that major central banks may need to keep interest rates higher for longer than some investors expect. As economic growth continues and the impacts of the pandemic on the global economy subside, persistent inflation remains a key challenge for policymakers.
Inflation Expected to Remain Elevated, But Stock Market Continues to Surge
According to John Luke Tyner, a portfolio manager at Aptus Capital Advisors, the stock market is currently ignoring any signs of persistent inflation. Despite a 5% risk-free rate, the market seems to be holding up well, and the major U.S. stock indexes are all higher as of Tuesday afternoon.
Tyner believes that inflation will remain elevated as long as employment remains stable. He sees inflation shifting from one sector to another, but not going away entirely. He also anticipates that unless the Fed pushes the narrative for higher rates, the stock market will continue to trade on anything that’s not negative.
Tyner believes that it will be tough to get inflation down to 2% or lower on a sustained basis without a significant impact on the economy.
As for break-even rates, which reflect investors’ inflation expectations years into the future, they are currently trading around the 2% level. Two- and 30-year Treasury yields are also higher.
Overall, it seems that while inflation may continue to be an issue, the stock market is thriving and looking for any positive news to trade on.
Inflation Expectations May Underestimate Reality, Says Glenmede Investment Manager
According to Robert Daly, director of fixed income at Glenmede Investment Management, inflation expectations may be lower than what will actually occur. With $4.5 billion in managed assets, Daly predicts that reaching 2% inflation in the coming year will be a challenge given the stickiness of inflation in the economy.
Daly suggests that inflation may settle at a near-term landing spot of 3%-4%, which brings into question whether the Federal Reserve finds this level acceptable. As the economy continues to shift, it’s important for investors to take note of potential fluctuations in inflation rates.
