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Inflation remains close to historic lows, not just in the United States but also in other large developed markets. Russ explains why this is the case and what it means for investors (hint: low-for-longer rates and another reason to consider underweighting Treasury-Inflation Protected Securities (TIPS)).
Inflation remains close to historic lows, not just in the United States but also in other large developed markets.
Last week, we got more evidence of this with news that U.S. import prices fell 0.7% in October and are now down 2% from a year earlier. And on Wednesday, the Bureau of Labor Statistics will report October’s consumer price inflation, which is expected to fall to around 1%, a low reading even by the diminished standards of the past four years. Similarly, outside of volatile food prices, inflation in other large, developed countries is running around 1.5%, with inflation in both Europe and Japan even lower.
As I write in my new weekly commentary, there are three big reasons for the lack of developed world inflation:
1. Low wage growth. Last week, the Bureau of Labor Statistics announced that unit labor costs in the United States actually fell at a 0.6% annualized pace in the third quarter. As long as there’s considerable slack in the labor market, wage costs will remain contained.
2. Excess capacity. There is a fair amount of slack capacity in U.S. factories and utilities. Capacity utilization – how much of our factories, utilities and other capital stock is being used – remains depressed. Practically this means few factory bottlenecks and little upward pressure on prices.
3. Slow credit growth. While the Fed has expanded its balance sheet, banks have not been lending aggressively. With credit growth slow, growth in the money supply is also muted.
Assuming this is the environment we’re in for 2014, there are two investment implications:
1. Low-for-longer rates will support stocks. While the Fed is likely to start to taper at some point in the next several months, short-term interest rates should remain anchored at zero throughout 2014, and potentially much longer. Low short-term rates will continue to support stocks by keeping margins and valuations higher than they would otherwise be.
2. Consider underweighting Treasury-Inflation Protected Securities (TIPS).I still don’t advocate increasing exposure to inflation hedges, particularly if those hedges are expensive. The lack of inflation is one reason that TIPS have underperformed so dramatically year-to-date. And despite the losses, this asset class, particularly long-dated TIPS, is still not cheap. Finally, while TIPS hedge against inflation, they’re vulnerable to rising real rates.
To be sure, none of this suggests that inflation won’t eventually pick up. But for now, to the extent we remain in a world characterized by slow wage growth, excess capacity, and modest credit creation inflation is likely to remain low, at least for the next year or so.
Sources: BlackRock Weekly Commentary, Bloomberg
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Walter Unger CCIM, CCSS, CCLS
I am a successful Commercial Investment Real Estate Broker in Arizona now for 15 years and I worked with banks and their commercial REO properties for 3 years. I am also a commercial landspecialist in Phoenix and a Landspecialist in Arizona.
WHETHER YOU LEASE OR OWN
NOW IS THE TIME FOR YOU TO EXPAND, UPGRADE OR INVEST.
we are at on the a rise of the cycle in Commercial Real Estate. so there is only one way and it’s called we are going up and now is the time for you to expand, upgrade or invest in Commercial Properties in Phoenix. The prices on deals I may get you will not be around forever.
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We barely could give land away the last few years, but times are changing. Even in those meager years, I sold more land across the state than most other brokers. Before the real estate crash I was a land specialist in Arizona with millions of dollars of transactions, but then I had to change and also sell other commercial investment properties, which was fun, but I am a Commercial Landspecialist in Arizonal, a Commercial Land Specialist in Phoenix and love to sell land, one acre to thousands of acres.
If you have any questions about Commercial Investment Properties in Phoenix or Commercial Investment Properties in Arizona, I will gladly sit down with you and share my expertise and my professional opinion in Commercial Properties in Phoenix or Commercial Properties in Arizona with you.Obviously I am also in this to make money, but it could be a win-win situation for all of us.
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Kasten Long Commercial
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