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Navigating Uncharted Waters During Record Inflation

Inflation is hitting North Texas, and historically safe hedges may not provide the best protection.
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We all remember commercials encouraging people to put their money in gold and silver—and being told they were largely a fear-mongering scam. In the last decade or so, inflation has hovered around a healthy 2 percent, and interest rates were low, creating little need for stockpiling. Now, conditions have shifted, but some North Texas experts say perhaps our response to those commercials should not.

Fueled by pent-up demand, cash surplus, supply-chain complications, and low interest rates, the nation’s rate of inflation hit 7.5 percent in January. “What’s different now is that people are feeling it,” says Eric Bennett, chief investment officer for Tolleson Wealth Management. “It’s the first time, probably since the 1980s, that people have actually felt it in their pocketbook in any material way, besides gas prices.”

In North Texas, inflation is slightly higher than the national average. The U.S. Bureau of Labor Statistics reports the consumer price index (which measures the change in the price of goods and is the most widely used measure of inflation) was up 7.8 percent in Dallas-Fort Worth in January 2022, compared to the year prior. To Bennett’s point, food prices jumped 6 percent, the highest increase recorded since 2008, and gasoline prices rose by 42.8 percent.

Not only are prices at record highs, but traditional inflation hedges are not providing the protection they once did. Commodities commonly see price increases with rising rates of inflation; recent Vanguard research suggests 7 to 9 percent for every 1 percent increase in the rate of inflation. Big shifts in gold, the stereotypical safe haven, did not occur until Russia’s attacks on Ukraine began in March, when it jumped 20 percent year over year. “Gold may not be a reliable inflation hedge today; historically it was viewed as a good hedge,” Bennett says.

Debra Brennan Tagg, president of Dallas’ BFS Advisory Group, advises that gold is generally not a good long-term investment, making timing tricky and trading less appealing. “The problem with gold is that you have to know when to go in and when to come out at the right time,” Tagg says. “You have to get two trades exactly right to make it work.” Though it’s been a good hedge during the Ukraine crisis, she explains, it typically better addresses broader concerns and not inflation specifically.

Similarly, Treasury Inflation Protected Securities (TIPS), government bonds where the principal amount is adjusted to account for inflation over time, are another traditional hedge. They can be an effective tool, but some experts believe other bond options are better. Bennett says TIPS were flat during the six months leading up to February, and Tagg feels current uncertainty makes TIPS a difficult bet. “TIPS are not enough to combat the type of inflation that could evolve due to the crisis in Ukraine,” she says. Bennett prefers floating rate notes, bonds purchased with variable interest rates. “If we can buy a floating rate bond that’s already yielding a lot more than TIPS and have the benefits of a rate reset, that’s a much better deal,” he says.

ALTERNATIVE OPTIONS

Real estate can work as an inflation hedge, but its effectiveness depends on leasing terms and the duration of inflation, which is currently highly uncertain. Sectors such as storage and multifamily, with short lease terms, allow property owners to pass costs to consumers via rent raises, but sectors such as office, with fixed, long-term rates, won’t offset short-term inflation. “You want to make sure you are not weighted in one asset type or another if you really want to use real estate as an inflation hedge,” says Tanya Hart Little, founder and president of Hart Advisors. She adds that she anticipates distressed assets, such as those that suffered occupancy losses due to COVID, will continue to provide an opportunity for investors.

Although traditional inflation hedges may not always offer the best fit, most experts feel Bitcoin, a much newer option, is still too volatile to offer protection. “Inflation hedge-wise, I’m skeptical about it,” Bennett says. Though the cryptocurrency’s market cap did increase 187.5 percent in 2021, that growth corresponded with some months of significant drops—51.3 percent in May 2021—and its performance does not seem to be linked with changes in CPI. “It is not the kind of thing that is going to actually create a hedge against anything because it’s so unpredictable,” Tagg says.

So, how should investors hedge against inflation? Bennett and Tagg feel conditions are still too uncertain to justify massive portfolio makeovers. “As a long-term investor, I’m not overly concerned about inflation,” Bennett says. “But in the short term, it could be kind of dicey.” He thinks better visibility will arrive later in the year and is optimistic that supply-chain issues will begin to clear up, causing positive shifts.

Tagg says a good reevaluation period may not come until things begin to stabilize in Ukraine. “The current trajectory of moves by Russia indicates that we should assume the possibility of much higher oil and energy prices for some period of time, which can create inflation in more areas than we have today,” she says. “The weird thing about what’s going on with inflation right now is that truly, nobody knows how it’s going to unwind.”  


Higher Costs of Living

Here’s a look at increases in some key consumer goods sectors in North Texas from January 2021 to January 2022, in comparison to national stats:

Food Prices
Food prices increased 6 percent in North Texas, compared to 7 percent nationwide. For food eaten at home, North Texas saw a 10.5 percent 12-month jump; the national increase was 7.4 percent. Takeout and dining expenses grew by 1.4 percent, compared to 6.4 percent nationally.

Utilities
Fuels and utilities rose 16 percent in North Texas, significantly lower than the national increase of 27 percent. Gasoline, however, rose 42.8 percent year-over-year, compared to 40 percent nationally.

Vehicle Costs
New vehicle costs were up 4.2 percent in the region, compared to 12.2 percent nationally. Used car costs were up a staggering 39.6 percent, compared to 40.5 percent across the country.

Housing
The 12-month change for shelter costs in DFW was 5.7 percent in North Texas, compared to the nation’s 4.4 percent rise.

Author

Kelsey Vanderschoot

Kelsey Vanderschoot

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Kelsey J. Vanderschoot came to Dallas by way of Napa, Los Angeles, and Madrid, Spain. A former teacher, she joined…

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