Reacting to the announcement in the US that Consumer Price Index inflation was unchanged in June, Thomas Wells, manager of the recently-launched Smith & Williamson Global Inflation-Linked Bond Fund, said: 

“Headline US inflation has been on a downward trajectory since February, leaving us in a relatively benign inflationary environment, and today’s number does little to change that scenario, particularly as the PCE deflator remains below the Fed’s inflation target of 2.0% year-on-year growth.

“If the Fed is indeed data dependent, this may slow down its desired pace of rate rises. However, we continue to believe it is driven more by its internal forecasts of growth and inflation, rather than the hard data we have seen of late which would not have justified the June tightening move. Having said all that, we believe the Fed has talked itself, and the market, into one more hike in 2017.”

Wells adds investors should look closely at wage inflation in the US as an indicator of inflationary pressure. “Arguably, wage inflation is a more important factor as far as the Fed is concerned, and this has only averaged c2.5% over the last year.

“Meanwhile, the challenge for bond investors is that the return of a modest and steady inflationary environment has occurred at a time when nominal yields are still very low but traditional inflation protection in the form of UK linkers is relatively expensive. TIPS offer materially better value right across the curve, but they are difficult for UK based investors to hold directly.”