It’s hard to believe that a year ago, people were fretting over whether we’d see the return of deflation. The March 2017 reading of the Personal Consumption Expenditure (PCE) price index may have rekindled some of those fears. The PCE price index dipped 0.2% for the month of March. Year-over-year, from March 2016 through March 2017, the index is up 1.8%, but this little dip in inflation is a good opportunity to think about where we’re headed with inflation.

The most obvious change in trend is from goods-price deflation to inflation. From 2013 through most of 2016, prices have fallen for many goods that consumers buy. This goods-price deflation has mainly occurred with durable goods—items expected to last three years or longer. This is especially true when it comes to things like appliances, telephones, televisions, and recreational goods.


Inflation has been held down by goods prices, but that has been changing

Technological improvements, global competition, and a stronger U.S. dollar have helped drive consumer goods prices lower. Lately, the value of the dollar relative to the U.S.’ trading partners has moderated. It rose steeply during 2014 through 2016, so the direction of the dollar will likely be an important driver of import price inflation.

A stronger dollar has helped import price deflation

Provided the dollar doesn’t make another move higher, and provided trade barriers aren’t erected to drive up the cost of imported goods—or to temper the influence of competition in the consumer goods market—it seems likely that inflation will continue to meander higher.

Goods prices may drag less on inflation going forward, and that’s important when investors consider where within the fixed-income market they can find opportunities to at least offset the eroding effects of inflation on one’s nest egg. This is where seeking global opportunities might help.

In the U.S., 67% of U.S. bonds by market capitalization in the Bloomberg Barclays Global Aggregate Index have been yielding more than 2% (as of 5-1-2017). There aren’t many opportunities in Europe or Asia, but in many emerging market countries, like Brazil and South Africa, 100% of the bonds have been yielding more than 2%. Higher yields typically come with greater risks—whether from currency effects, political risks, or risks of default—which makes it important to think about a targeted approach to navigating these markets.

Percent of bonds by market capitalization that have been yielding more than 2% as of 5-1-2017

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