Eaton Vance
February 21, 2017
Eaton Vance provides advanced investing to forward-thinking investors, applying discipline and long-term perspective to the management of client portfolios.

Why inflation is rising and what it means for investors

Stewart Taylor, Diversified Fixed Income Portfolio Manager


Boston - It's looking more likely that April 2015 marked a low in inflation as measured by the headline Consumer Price Index (CPI), and that inflationary pressures could continue to build over the next several years.


In January, headline CPI as reported by the Bureau of Labor Statistics increased a strong 0.6%, the strongest January print since 2013. Additionally, the year over year growth rate increased to 2.5%, the highest since March 2012. This is a remarkable turnaround in inflation prospects after the well-publicized deflation fear of only two years ago.


Examining the most recent data for January reveals more troubling trends. Price pressures were broad-based with all major categories, except for used autos, seeing month-over-month gains. Items like medical care services up 3.6% year over year, and shelter costs up 3.5% year over year continue to be significant sources of inflation.


Inflation has been stealthily rising across most categories over the last several years, but this strength had been masked by the extreme weakness in energy and goods. Now, energy and goods inflation are contributing positively and becoming additive to the already strong inflation being generated by the services sector.


The trend in headline inflation has clearly turned higher and it is my view that the factors contributing to higher inflation will continue to press headline CPI higher over coming years.


  • The year over year Producer Price Index (PPI) trend is rising for the first time in nearly two years. PPI is a primary measure of inflation at the wholesale level. These changes tend to be reflected months later in CPI inflation.
  • The election outcome increases the likelihood of higher inflation. Protectionist policies and tax reform, if enacted, are inflationary.
  • Historically it is rare to have inflation without wage growth and now there are clear signs that wages are beginning to rise. The Atlanta Fed Wage Tracker, an index that adjusts for the downward pressure on wages due to 10,000 baby boomers retiring each day, is rising at a strong 3.5% annual rate.
  • Economies can produce inflation domestically or they can import it. Now, after moving definitively below zero in early 2014, both import and export inflation are positive and trending higher.

Bottom line: Years of falling or very low inflation have left investors poorly positioned to protect the purchasing power of their savings and investments. Shorter duration investments that offer inflation protection can help provide some relief for investors. We think the addition of select inflation-protected assets to the portfolio mix is timely, as the market begins to digest 2017 data.




Investing involves risk including the risk of loss. Interest payments on inflation-linked securities may vary widely and will fluctuate as principal and interest are adjusted for inflation. Investments in inflation-linked securities may lose value in the event that the actual rate of inflation is different than the rate of the inflation index.

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