This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Even When Low, Inflation Can Hurt

NEW YORK ( TheStreet) -- Inflation fears have subsided as the economic outlook has darkened once again. This is boosting the dollar and sending gold prices lower while many observers are pushing the Federal Reserve to take more drastic monetary policy actions to support the economy as a gridlocked Congress stands idle.

Even if policymakers overlook the threat of inflation, though, investors shouldn't forget the damage that even low-level inflation can have on their holdings -- particularly at a time when interest rates are at record lows.

The Consumer Price Index, which is the official reading of inflation in the U.S., has increased by 1.7% over the last 12 months through May, according to the U.S. Bureau of Labor Statistics. That marks a steady decline from the 3.9% peak last September, and it's a historically low level. Meanwhile, Federal Reserve Chairman Ben Bernanke said Wednesday that the Fed's Open Markets Committee foresees prices remaining stable with the inflation rate at or below the central bank's 2% target.

The market appears to agree, with futures prices showing a decline in expectations for inflation over the next five years. All this provides fodder for those who have argued that the U.S. economy is facing a deflationary predicament, dismissing arguments from opposing camps that the extraordinarily accommodative stance of the Federal Reserve in response to the financial crisis and its aftermath will spark an outbreak of inflation.

Still, when investors are scrambling to buy 10-year Treasuries at a yield of less than 1.7%, I think we can all agree that even modest inflation at a rate of 1.7% is devastating. Investors that hold a 10-year Treasury to maturity under these circumstances are facing the unwelcome prospect of suffering a long-term decline in the value of their holdings in real terms. Inflation is completely wiping out their yield.

Sure, yields on Treasuries could go lower, sending prices higher and giving holders the prospect of a capital gain if they're willing to sell. But we're already at record lows. How much lower can we go? I would submit that buying Treasuries and other investment grade bonds at current prices is not a "buy-low, sell-high" strategy -- quite the opposite, actually. And let's bear in mind that the whole point of investing is to buy assets at a low price and sell them at a higher price.
1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
BRK.A $201,360.00 -0.13%
BRK.B $134.09 -0.40%
MRK $53.01 -1.76%
STR $18.95 -0.63%
XOM $81.66 0.53%


Chart of I:DJI
DOW 17,719.92 -78.57 -0.44%
S&P 500 2,080.41 -9.70 -0.46%
NASDAQ 5,108.6660 -18.8590 -0.37%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs