Jim Niedelman:
Time now for this latest edition of 4 Your Money. We’re joined by James Nelson, financial advisor with NelsonCorp Wealth Management. Great to see you, James.
James Nelson:
Thanks Jim. Thanks for having me.
Jim Niedelman:
We certainly have seen a lot of prices go up recently when it comes to houses, building materials, financial assets as well. Should people at home watching right now worry about inflation getting out of hand?
James Nelson:
Yeah, it’s definitely starting to tick up to some degree. We’ve seen prices increase with commodities specifically. Oil and gas, energy in general, precious metals, agricultural commodities all have risen to about 10 year highs this first time in a long time where we’ve seen an extended period of time where prices have increased. So it’s obviously a concern of ours.
James Nelson:
The other interesting thing is manufacturers have seen their input costs go up for the first time in a long time. So, if things are on the rise, then yeah, it’s definitely something people should pay attention to.
Jim Niedelman:
What type of indicator do you look out for that shapes your opinion on this?
James Nelson:
Yeah, so the CPI, the consumer price index is still pretty tame right now, which is a little bit surprising. We are watching that and other various measures. And I think we’ve got a chart here that illustrates this. We’ve got the blue line that shows what is called the breakeven rate. Specifically, we are showing a five-year rate here. What that means is the yield of a normal five-year treasury bond. Then we subtract the yield of five-year treasury inflation-protected security bond.
James Nelson:
Essentially what that tells us is the inflation rate that we’d need to see over the next five years for those two bonds to be equal. The yellow line on the top, we have drawn here is over the next five years is as high as the previous years. And this has also reached 10-year high. In absolute terms, inflation is still at 2.3%. That’s what that yellow line’s kind of zeroed in at. So nothing even close to the runaway inflation we saw in the 1970s.
Jim Niedelman:
So we know the people who are watching at home are always concerned about their investments. So how does this impact what they do with their accounts?
James Nelson:
Yeah. If we see inflation go up and interest rates go up to any large degree, that really could upend a portfolio. The low levels of inflation interest rates have been a big win for stocks and bonds on the last 20 years. It’s really been a good thing, but if rates do start going up, inflation starts going up, bonds would probably be most at risk. So, looking at some tips, also some stocks paying dividends may start to look a little bit more in favor than they have in the last 10 years. So those are a few things that we’re keeping an eye on.
Jim Niedelman:
James Nelson with NelsonCorp Wealth Management, thanks so much for the insight, James.
James Nelson:
Thanks Jim. Thanks for having me.
Jim Niedelman:
Absolutely. And if you missed any of this discussion, we have that available for you on OurQuadCities.com.