In mid-2021, prices of goods and services in the US started to rise sharply because of pandemic-related effects: supply-chain disruptions, labor dislocation, and consumers’ built-up cash. The graph above shows inflation since 2010.
Inflation peaked in June 2022 and is now trending down. A key component of overall inflation, the Personal Consumption Expenditures price index is now at 5% after peaking around 7%. The Federal Reserve is widely expected to end interest rate increases later this year.
The trend line is in the right direction now… will it continue downward?
Bonds were crushed during this burst of inflation because the Federal Reserve raised short-term rates to push inflation down. Bond prices go down when interest rates go up. A widely used index for bonds* lost 13% in 2022.
But today, that same bond fund has a yield of 4% from a low of about 0.5% just after the pandemic began. That’s good for bond investors, especially if inflation and interest rates continue to trend down. The yield is the interest paid to investors in a bond fund.
Now that bond yields are up, stocks are somewhat less attractive unless corporate profits grow considerably in 2023.
Of course the future is uncertain, but it’s encouraging to see that inflation is now heading down, and there is some confidence in the Federal Reserve’s ability to do its job.
Notes
- using Vanguard BND as a proxy for the Bloomberg Aggregate Bond Index
- Data graph from the St. Louis Federal Reserve: fred.stlouisfed.org
This information is of a general educational nature, not individual investment advice. Investing involves risk of loss. A diversified portfolio does not protect against a loss or guarantee a gain.