November 2010

 

Ask a trust officer:

Inflation outlook

 

DEAR TRUST OFFICER:  

 

What’s up with inflation?  I see gas prices are going up, yet there’s no increase in Social Security payments?  Should I be worried?  —LIVING ON A FIXED INCOME

 

DEAR LIVING:

 

Remember the $4 per gallon gas prices of 2008? Those were factored into the CPI that year, and the 2009 Social Security payments got a boost that, in hindsight, may have been higher than necessary. Because of the recession, consumer prices have been relatively stable, and some costs, such as for housing and fuel, are down. Until the CPI catches up to and surpasses the 2009 levels, there won’t be another increase in Social Security payments.

 

There is no sign at the moment of an imminent outbreak of inflation, but there was one ominous development in late October.  At an auction by the Treasury of $10 billion worth or Treasury Inflation Protected Securities (TIPS), the five-year bonds were so popular that they sold at a negative interest rate, the first time that has ever happened. In effect, investors paid the government for the privilege of lending it money, instead of charging interest.

 

Why would they do that? Because the interest and principal payments of TIPS will be adjusted as inflation occurs in the future.  Evidently, these investors expect that inflation will be high enough to more than compensate them for the negative interest rate. The recent fall in the value of the dollar, as well as the soaring price of gold, are also indicators that suggest to economists that significant inflation could be coming.

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Do you have a question concerning wealth management or trusts? Send your inquiry to tormey@pgbank.com

 

 

 

(November 2010)

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