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Posted by on May 16, 2014 in Laif Meidell

Consumer price index big influence on rates

Consumer price index big influence on rates

By Laif Meidell, CMT, president of American Wealth Management, and portfolio manager of the AdvisorShares Meidell Tactical Advantage ETF (MATH)

The most widely followed monthly indicator of inflation is the consumer price index. This indicator measures the change in the cost of goods and services purchased by consumers and is considered a cost-of-living index. The CPI has evolved over time as consumer expenditures have changed. Commodities only make up 40 percent of the index, while the remaining 60 percent are services. Increases in Social Security payments and, many times, labor contracts are tied to the CPI.

On Thursday, the CPI for the month of April was released, showing a gain of 0.3 percent over the prior month, with energy prices partly to blame for the increase. Inflation readings vary from month to month, and the large increase from March to April is not reflective of the general price increases seen over the past year. In fact, the CPI has only gained 2.0 percent over the past 12 months.

It is said that the Federal Reserve follows the “core” inflation, which effectively excludes the cost of food and energy from the formula. Although I recognize the price of food and fuel can be volatile, this makes little sense to me, since what could be more core to the average consumer’s monthly needs than food and energy to heat their home or fill their gas tank? Food and energy make up only one-fifth of the CPI.

The CPI matters to us as investors because inflation influences the markets. Lower inflation typically translates into lower interest rates and higher prices in the bond market, like we are seeing today. Lower interest rates also tend to be good for corporate profits, which can cause the stock markets to rally as well.

High-quality bonds can play many parts on the stage of investing. At times, they play the part of the hero to rescue investors’ dollars from the dangers of the stock market. At other times, they are the common man, working from day to day to make their small contribution to the community (portfolio).

This past week, high-quality bonds were at the top of our bond list, with the Barclays U.S. 20+ Year Treasury bond index gaining 2.02 percent over the past five trading days and up 7.04 percent over the past three months. Inflation-protected U.S. Treasury bonds were second on our list with the Barclays U.S. Treasury Inflation Protected Securities index gaining 0.95 over the past week.

This commentary originally published in the Reno Gazette-Journal.   Performance numbers used in this article were obtained through eSignal and are not guaranteed to be accurate.

The AlphaBaskets blog provides frequent market insight and commentary by AdvisorShares Investments, LLC, created by AdvisorShares and other leading active managers.  AdvisorShares Investments is an SEC-registered investment adviser and the investment adviser to the AdvisorShares actively managed ETFs. The views expressed on AlphaBaskets should not be taken as investment advice or a recommendation for any of the actively managed ETFs advised by AdvisorShares.