Opinion: Good news for retirees and retirement savers — inflation may be working in your favor

Retirees and those looking for a secure income got two very good news this week, although you may have heard only one.

Meanwhile, your ability to earn a guaranteed return on risk-free investments, no matter what happens to inflation, has actually increased.

So-called TIPS bonds, government bonds protected against inflation, fell slightly in price this week. And as a result, available interest rates for new buyers went up. (Bonds work like a seesaw: when the price falls, the “yield” rises.)

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A 5-year TIPS bond is now guaranteed to beat inflation by 0.3% per year between now and 2027, regardless of what inflation turns out to be, and a 30-year TIPS bond is guaranteed to beat inflation by nearly a full percentage point. beat per year. year. That corresponds to a purchasing power increase of 35% between now and 2052.

What will happen to inflation in that time? I have no idea. No one else either. Some extremely smart and experienced financial minds – including fund managers David Einhorn of Greenlight Capital and Jonathan Ruffer in London – believe that inflation will rise, and will continue to rise. Einhorn recently suggested that the recent slump in inflation, to use last year’s buzzword, is likely to prove “transient.”

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Could they be right? President Joe Biden boasted this week that inflation has now fallen to 0%, month-on-month, but at the same time pointed out on Twitter that the job market is booming and workers have the bargaining power they haven’t had in decades — meaning their wages are likely to rise.

Rising wages wouldn’t be inflationary if they were accompanied by rising productivity, but unfortunately the latest data shows that labor productivity has fallen this year.

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So the people who say inflation hasn’t gone away may not be crazy.

On the other hand, you have to wonder about all those millions of people who, perhaps unconsciously, are taking a big gamble the other way.

That includes anyone who owns regular or nominal government bonds. If you’re a retiree or a low-risk investor, and you own a standard, lower-risk, or balanced-type portfolio, you’re probably one of those too.

To see: An Investor’s Guide to the Inflation Reduction Act – and What the Bill Means for Your Portfolio

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Also: Stock market euphoria meets bond market pessimism as ‘strange week’ draws to a close

And: Fed’s Barkin wants to raise interest rates until a ‘sustained period’ of inflation is under control

The standard (non-inflation-protected) 5-year treasury yields about 3%. The 10-year yields less, about 2.9%. The 30-year is only slightly above 3%. Those returns only make sense if you believe that inflation has collapsed and will continue to collapse.

I’ve written here before about so-called break-evens, a technical measure in the bond market that effectively anticipates future inflation. At the moment, the 5-year break-even is about 2.7% and the 10-year break-even is about 2.5%. What this means is that anyone who owns a 5-year regular government bond, rather than a 5-year TIPS bond, is unknowingly making a bet that inflation will average less than 2.7% per year over the next five years. Anyone who owns a 10-year regular government bond, rather than the 10-year TIPS bond, is betting that inflation will average below 2.5% between now and 2032.

That’s quite a gamble.

To see: Fed’s Kashkari Says July CPI Is ‘First Hint’ Of Possible Good Inflation News

And: Fed’s Evans says July CPI data was ‘positive’ but ‘nobody can be happy’ with 8.5% annualized inflation

It’s beyond me why these traditional or old-fashioned government bonds are still considered “risk-free” assets. They only pay nominal interest. Buy a bond that pays 3% a year for 10 years and see how risk-free that is when inflation comes in at something close to 10% a year.

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It’s honestly hard to see much advantage buying traditional bonds over TIPS. Even if inflation is low, how low will it be? And do you really want to bet with your retirement account?

Meanwhile, in case you missed it, the past few days have sparked one of those political debates about “real” inflation. The president, backed by his official spokesman, has argued that it is really 0% because prices have not risen between June and July. His critics have argued that the real rate is 8.5% because that is the July price change from a year earlier.

I am not unsympathetic to the matter looking at the most recent monthly price increase. After all, it is the most recent data. But extrapolating from that to “inflation is 0%” is the kind of public relations that turns a good data point into a punch line.

In the meantime, I have a suggestion.

To all those people who are excited that the real inflation is now 0%, go bet on it. Go out and buy 30-year zero-coupon bonds, fixing 3.1% interest per year between now and 2022 and 2052. If you’re right, you’ll stand out as bandits.

Good luck.

Meanwhile, if you live in the real world and you pay real prices in real stores, and you don’t feel like betting your savings on future economic indicators, TIPS bonds over regular Treasurys seem like an easy choice to me.

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