Professionals scorn TIPS and CPI
Monday, July 7th, 2008
Categorized as: TIPS
Financial professionals are steering clients away from TIPS because, they say, the Consumer Price Index doesn’t accurately measure inflation, according to TIPS Flunk Inflation Test as Gasoline, Groceries Overtake Government’s CPI from Bloomberg.com.
Instead they recommend inflation swaptions - an investment on which they can earn commissions (these guys don’t miss a beat) and which is guaranteed by the company that issues it rather than the U.S. government.
Notice the story fails to mention that TIPS investors are earning far more right now than investors in any other type of Treasury security. This is because the CPI, woefully inadequate as it is, is more than the difference between the TIPS rate and the rates of other Treasury securities.
For example, today’s 10-year Treasury rate is 3.99%. The 10-year TIPS rate is 1.42%. If the CPI is more than the difference - 257 basis points - TIPS are the better deal.
So this month the inflation component of TIPS is based on May’s inflation, which - expressed as an annual rate - was 10.11%, for a total May rate of over 11.5%. That’s 754 basis points more than 10-year Treasuries, but somehow that didn’t make it into the article.
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Tom Adams
More scorn for the professionals behind this from Mish’s Global Economic Trend Analysis blog.
Doesn’t the CPI that’s used for TIPS and I Bonds include food and energy? Many people dismiss the core CPI since it excludes food and energy, and they assume this is the only CPI that is used. But I thought CPI-U which is used for I Bonds does include food and energy so it should be a somewhat realistic measure of inflation.
Ken - yes, the CPI-U that TIPS and I bond inflation components are based on includes food and energy.
However, the methods used to produce the CPI-U have changed through the years and this simply isn’t the same index as it was in the 1980s. For more information, a good place to start is with the recent Harper’s magazine article by Kevin Phillips.
Tom Adams
All - There are more comments on this post on Moringstar.com at this link.
Tom Adams