I am following along! Although JackoC’s post went a bit over my head. Is there an actionable step from his post?Took me a while to figure out LRA meant "low risk asset."Again, this might be 'right' in some context, but has next to no relevance in answering my question 1 above: how do TIPS compare to nominal treasuries, assuming govt obligations are the main LRA?My home and auto insurance have increased at a rate far lower than inflation and I live in a neighborhood with extremely low climate and theft risk. Due to a vegan diet my food costs have increased at rates far below inflation (tofu and soy milk cost the same as they did 10 years ago). I have not purchased gasoline for well over a decade and my energy costs are effectively zero due to a solar and battery system with a hybrid inverter.How can you possibly have no correlation if things like insurance, services, energy bills, food, and gasoline go up with inflation?B) In a normal inflation environment, my personal inflation is not correlated with the official inflation.
Klangfool is exactly right that what matters is one's own personal inflation rate, not CPI or PCE.
There's really 3 things. CPI-U (the index of TIPS, PCE isn't directly relevant) v the (hypothetical) True Overall Price Level (what CPI-U is supposed to measure) and What it Costs Me to Live, not properly called 'inflation' (which means overall price level). WCML is an inherently dicey concept because people have trouble filtering out the effect of real lifestyle changes. And if WCML didn't even try ('my WCML exploded, because I decided to live higher on the hog') it would be obviously useless in an asset choice context. Assume WCML somehow filters out lifestyle changes.
One argument is about CPI-U<>TOPL. Another is CPI-U v WCML assuming CPI-U=TOPL. But the second is a universally acknowledged basis risk, it's knocking over a straw man whenever that's presented as if a revelation.
Assume CPI-U=TOPL. Very high increase in CPI-U will certainly correlate with high increase in WCML, one thing to say they tick along in normal times at somewhat different rates, ridiculous to say WCML wouldn't go up a lot if CPI-U=TOPL increase =20% pa. Or assume instead CPI-U is deliberately cooked to be <TOPL when TOPL increase is high. WCML will still go up to whatever it goes up to. So the (hypothetical) cooking is clearly bad for TIPS relative to no cooking. But what's happening to nominal bonds bought now, in either scenario? They are getting completely crushed, trailing WCML by more than TIPS. 'But I gave up sizeable expected return for TIPS to fully reflect TOPL'..at usual TIPS market pricing it doesn't appear you do. And if high inflation scenarios can be written off, while that would be a reason not to prefer TIPS as much, it also has little directly to do with WCML.
How about question 2, 'should govt bonds be the main LRA or something else or do you need LRA or is there any such thing? There's obviously no asset that tracks WCML. You might hypothesize that some assets would track TOPL better than (hypothetically) cooked CPI-U. But that would be about those assets, it doesn't relate directly to WCML Gold might, with known drawbacks. Or perhaps other rich countries' govt bonds (not FX hedged). Stocks are an absurd suggestion specifically as a way to lower risk in an environment where inflation gets of control.
It's obvious change in WCML can be different than change in CPI-U but that doesn't turn out to be very relevant to either question about practical choice of assets.
I hope OP is still reading along. This from JackoC is 100% right and cuts through much of the confusion that has been on display.
Statistics: Posted by TrustTheMarket — Tue Oct 08, 2024 8:49 pm — Replies 102 — Views 6492