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Low Inflation = Low Interest Rates

The high levels of recent government spending and resulting huge budget deficits have stirred the inflation hawks in recent months. The “talking head” investment advice on television has been touting inflation protection in the form of traditional inflation protecting investments such as TIPS bonds, Gold, Commodities, and even Real Estate Investment Trusts (REITs). Inflation, as always, remains a long-term risk for investors, but we do not expect its return anytime soon.

Why is inflation less of an immediate risk than in the past? Several forces should keep it in check:

  1. Housing prices are still in decline and commercial real estate vacancies are high, meaning there will no real estate inflation and business leasing costs will remain low.
  2. Capacity utilization is at low levels, leading to auto price declines and forcing other manufacturers to keep prices low to keep factories running.
  3. Unemployment is high and rising, so wage inflation is not an issue for now.
  4. Import prices are flat, the recession is global and overseas suppliers are holding the line on import prices to the U.S.

All of these forces will remain in place for the immediate future, keeping inflation in check, and allowing the Federal Reserve to keep interest lows until the economy fully recovers. There will come a time to worry about inflation protection, and we will monitor inflation’s signals, but it is not quite a worry yet. So take advantage of these low interest rates, and keep in mind that your investment portfolio will typically perform best during times of low or moderate inflation. So if you have assets to put to work, this is a great time!

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