What's Next for Investors as Inflation Sticks Around

What You Need to Know

Investors should consider hedging against inflation and think about how extended elevated interest rates might affect their portfolios, says one strategist.
Deflationary pressures in goods may be abating, Jefferies analysts wrote.
A Senior Citizens League survey finds concern among retirees.

Consumer price data for January suggests inflation may be more stubborn than expected, although it continues to moderate year over year, market analysts said after the government released the latest figures Tuesday.

Investors should consider continuing to seek ways to hedge against inflation, given its persistence, a top BlackRock strategist wrote.

The Consumer Price Index showed year-over-year inflation slowed to 6.4% from 6.5% in December — higher than the consensus view but marking the seventh straight year-over-year decline, BlackRock’s Gargi Chaudhuri, head of iShares Investment Strategy, Americas, noted.

The index increased 0.5% on a monthly basis, in line with expectations, after January’s unexpected 0.1% decrease, she added. Core inflation, which excludes food and energy, softened to 5.5% year over year from 5.7% in December, while the monthly number was 0.4% higher, compared with a 0.3% increase in December.

Moderating, but Stubborn

“This inflation print served as a reminder to investors that the path to lower inflation is not as clear-cut as previously thought and it is too early for the Fed to declare victory on inflation,” Chaudhuri wrote. “While the economy has experienced meaningful cooling in prices recently, the tight labor market and continued growth in wages also remind us that many pockets of the economy are still strong.”

She and others cited price growth in services as a key factor in persistent inflation.

“We believe inflation will continue to remain stubbornly high for the rest of 2023 but will moderate to around 3.5% by the end of the year, above the Fed’s 2% target,” Chaudhuri said. “While we can safely say that we are past peak inflation, it is too early to call victory on the battle against higher inflation.”

Investors should continue to consider hedging against inflation and think about how extended elevated interest rates might affect their portfolios, she added.

“We have conviction towards inflation-linked bonds over nominal bonds. For other ways to potentially hedge inflation, we like infrastructure stocks. Infrastructure owners could benefit from increased infrastructure spending on the back of the Infrastructure and Jobs Act,” the BlackRock strategist added.

In a high-interest-rate environment, investors can find attractive fixed income yields across the curve, such as allocations to the short end of Treasury markets and the front end of investment-grade credit, she said. In equities, BlackRock prefers value-style exposures.

Services, Housing Inflation Persist

Vanguard senior economist Andrew Patterson said Tuesday’s CPI report “highlights the work left to be done by the Fed. While inflation is heading in the right direction, there is a long and bumpy road ahead to price stability.”