Here’s the Inflation That the Bond Market is Freaking Out Over.

November 16, 2016by Hoy Grimm0

Even before Trump’s election win in November the bond market has been signaling that inflation is becoming a problem. 10 year US Treasury yields bottomed on July 6th at 1.36% and rose 1/2% from July to election day:

After Trump’s victory you can see that rates jumped another 40 basis points (.40%) in a matter of days. The Federal Reserve Open Market Committee has markets anticipating a quarter point rate increase in December. The huge post-election rate increase effectively stole the Fed’s thunder. When the market speaks this emphatically, investors should pay serious attention. Here is the question this rate/price action raises, “Where is this inflation worry coming from?” Former Dallas Fed Senior Financial Analyst, Danielle DiMartino Booth digs into monthly CPI statistics to reveal two areas of concern

[testimonial author=” Danielle DiMartino Booth” title=”DiMartino Booth – Money Strong” avatar=”/images/Danielleblue.jpg” icon=”icon”]
“It comes down to the services side of the equation, which has been fueled by the Affordable Care Act and rental inflation that’s risen into the stratosphere care of the low interest rates that have encouraged luxury unit construction. To be precise, the CPI tells us rents are up by 3.7 percent in the last year, which is apt to be understated for reasons you need not be bored with, while medical care prices are up by 4.9 percent over 2015. So it’s safe to say services inflation has been driving the train.”

We prepared two visuals for the data that she highlights: The first is a comparison of rent inflation to broad CPI. We can thank Millennials who prefer luxury apartments over buying their own homes for this inflation bump.  

The Affordable Care Act (aka Obamacare) has started to exert huge inflationary pressures on consumer wallets. This chart displays medical inflation through the latest data from September. Once the October numbers are reported this is sure to escalate even further.

In October, Fed Chair Janet Yellen signaled her willingness for our economy to “run hot”. We are there and the bond market sniffed this out in the summer. Investors should watch inflation in these spending categories going forward to see if the problem gets worse. If so, you may want to join the ranks of the #InflationPreppers.  

Our bigger concern is that this (contained) inflation won’t be offset by growth in other parts of the economy and we will have to revisit the 70’s and educate investors on the perils of Stagflation.

Hoy Grimm

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