Inflation Fears Subside

The Lehman US Treasury Inflation Protected Securities ETF (TIP) is having one of its worst days of the year today, down a little more than 1.5%.  As shown in the first chart below, the ETF has been in a downtrend since topping out in mid March.  In the bottom chart, we compare the TIP ETF with the CRB Commodity index.  The two are relatively correlated, since TIPS "protect" against inflation, while the CRB index measures commodity prices. 

Interestingly, the TIP ETF has led the CRB index in their most recent rallies and declines.  The TIP made a short-term bottom last June and rallied sharply through this March.  The CRB index didn't really begin its spike until last August, and it didn't top out until early July.  Both are currently declining, which means inflation concerns are subsiding.  Based on recent trading patterns in the two, it may be worthwhile to look for a bottom in TIP before looking for a rally in commodities.

 

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Comments

[Brad Zigler]

From Hard Assets Investor (14 August 2008):

http://www.hardassetsinvestor.com/component/content/article/3/1020-computing-inflation-in-real-time.html#comments

"If inflation's the loss of purchasing power metered by price changes, why not use a monetary constant like gold to take its true measure?

'Gold's price is readily available as is the dollar's value against other currencies. You could, for example, keep track of the price of gold in greenbacks and in euros. The difference in the rates of appreciation (or depreciation) can give you the basis for calculating your purchasing power loss (i.e., inflation).

'In May 2006, for instance, gold sold for $658 or €515. As of yesterday's morning fix, the metal was worth $817 or €549. That's 24.2% appreciation in the dollar price, but barely a 7% uptick in terms of euros. Annualizing the difference in the rates of return gives you an implied inflation rate of 13.6%."

[Brad Zigler]

From Hard Assets Investor (14 August 2008):

http://www.hardassetsinvestor.com/component/content/article/3/1020-computing-inflation-in-real-time.html#comments

"If inflation's the loss of purchasing power metered by price changes, why not use a monetary constant like gold to take its true measure?

'Gold's price is readily available as is the dollar's value against other currencies. You could, for example, keep track of the price of gold in greenbacks and in euros. The difference in the rates of appreciation (or depreciation) can give you the basis for calculating your purchasing power loss (i.e., inflation).

'In May 2006, for instance, gold sold for $658 or €515. As of yesterday's morning fix, the metal was worth $817 or €549. That's 24.2% appreciation in the dollar price, but barely a 7% uptick in terms of euros. Annualizing the difference in the rates of return gives you an implied inflation rate of 13.6%."