U.S. Inflation Update: More Long-Term Threat than Near-Term
American Century Investments
June 28, 2012
During the week of June 11-15, the U.S. government’s Bureau of Labor Statistics (BLS) reported declines in May prices received by U.S. producers for their goods, as well as lower May prices paid by U.S. consumers. These May declines in the BLS’s Producer Price Index (PPI) and Consumer Price Index (CPI) were largely the result of declining energy prices, particularly those for gasoline.
Besides gasoline, commodity prices in general have declined this year as global economic growth has softened—the S&P GSCI® (Goldman Sachs Commodities Index) declined 9.84% year to date through June 15, while the energy component of the index declined 11.77% over the same time frame.
The graph below shows, out in 2012, the broad impact of slowing global economic growth and declining commodity prices on global consumer prices, focusing particularly on the so-called BRIC bloc (Brazil, Russia, India, China) of rapidly developing economies, and the developed economies of the Eurozone and the U.S.
The latest readings are mostly declining, though, in the case of the developed economies, they remain well above their lows reached in the wake of the 2008 Financial Crisis—the developed economies remain closer to their historical long-term averages than to any extreme highs or lows.
The Global Macro Strategy Team at American Century Investments expects U.S. inflation to remain contained through the rest of 2012 and into early 2013. Near-term constraining U.S. inflation factors, besides the aforementioned slowing economic and commodity price forces, include lingering (from the Great Recession) excess capacity levels in both the U.S. labor market and the U.S. manufacturing sector.
But, looking longer-term, the team remains concerned about “inflation complacency”—unexpected inflation can be damaging to the financial assets of investors, and the team believes that higher inflation will likely occur within the coming three-to-five-year time frame. The team thinks that higher inflation than what is presently priced into the U.S. bond market will likely result from the unprecedented monetary and fiscal policies enacted in response to the 2008 Financial Crisis and its lingering aftereffects.
As a result, the team strongly believes that some level of inflation protection (in the form of inflation-linked securities, investments linked to real assets, non-dollar investments, etc.) should be incorporated in investor portfolios.
The opinions expressed are those of the Global Macro Strategy Team at American Century Investments and are no guarantee of the future performance of any American Century Investments portfolio. This information is not intended to serve as investment advice; it is for educational purposes only.
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