WEEKLY BRIEF | Inflation's New Normal

Hello, and welcome to the IVA Weekly Brief for Wednesday, July 15.

There are no changes recommended for any of our Portfolios.

Inflation cooled in June. I don't think that means the inflation fight is over, though.

According to the Bureau of Labor Statistics (BLS), consumer prices fell 0.4% in June, pulling the year-over-year Consumer Price Index (CPI) down to 3.5% from 4.2% in May. Core inflation—which strips out food and energy to show the underlying trend—fell 0.2% in June, bringing its annual rate down from 2.9% to 2.6%.

Traders took the June report at its word and bought bonds on the expectation that inflation will remain cool and Federal Reserve policymakers will hold off on hiking interest rates. Bond prices rose; yields fell.

I'm not ready to declare victory. Set aside the re-escalating war with Iran for a moment—my take is that COVID ushered in a new inflation era. Inflation averaged 2% before the pandemic; it's settled closer to 3% since. After three years, we can say that's the new normal, not a detour.

Fed Chairman Kevin Warsh told lawmakers he has "no tolerance for persistently elevated inflation." Wanting inflation lower doesn't make it so. Warsh and his colleagues have to balance fighting inflation with higher interest rates against pumping the brakes on economic growth.

I’d expect the hike-versus-hold debate to remain unresolved for much of this year.

Bonds or Cash Depends on Your Outlook

Let’s consider three scenarios:

Inflation returns to 2%: Bond yields fall, prices rise. Bonds beat cash.

Inflation holds around 3%: Bonds still win, but narrowly. Total Bond Market Index (VBTLX) yields about a one percentage point more than Federal Money Market (VMFXX)—4.56% to 3.55%. That's roughly your expected annual edge over the next decade if nothing changes. (Of course, a lot can happen in 10 years.)

Inflation rises further: Bond prices fall, yields rise. Cash wins.

If you're confident in one scenario, bet on it—go all cash or load up on long-maturity bonds. If you're not, diversify across the spectrum instead of picking a side.

Rising inflation is the bigger risk to your portfolio, so I favor a bit more cash than bonds right now. But the framework matters more than my personal tilt—use it to find your own positioning.

Our Portfolios

Our Portfolios are showing solid returns for the year through Tuesday. The Aggressive Portfolio is up 13.9%, the Aggressive ETF Portfolio is up 11.2%, the Growth Portfolio is up 12.3%, the Moderate Portfolio is up 12.2% and the Conservative Portfolio is up 7.2%.

This compares to an 11.4% gain for Total Stock Market Index (VTSAX), a 12.6% return for Total International Stock Index (VTIAX), and a 0.1% gain for Total Bond Market Index (VBTLX). Vanguard’s most aggressive multi-index fund, Target Retirement 2070 (VSNVX), is up 10.8% for the year, and its most conservative, LifeStrategy 20/80 (VASIX), is up 2.6%.

IVA Research

Yesterday, I completed my three-part series on 529 plans for Premium Members.

Part one covered the basics: 529 Plans: Older and Wiser.  Part two took a closer look at “the” Vanguard 529 Plan: 529 Plans: What's in the Toolbox. In part three—College Isn't Retirement—I discussed how I think about investing for a loved one’s college education.

Next week, I’ll dive into 530A Accounts—better known as Trump Accounts—with Premium Members. Stay tuned.

Until my next IVA Weekly Brief, have a safe, sound and prosperous investment future.