What should retirement plan sponsors do about the possibility that prices might rise (or fall) a lot?
Most experts say the best mainstream strategy that advisors can recommend to employers is to offer a solid, diversified set of mutual funds, along with options that guarantee return of principal.
Some experts are talking about funds that invest in "inflation-linked" securities, such as Treasury Inflation Protected Securities, and a few advisors say plan sponsors might consider offering adventurous participants a little exposure to swings in commodity prices.
To many investment experts, the idea of talking about the return of severe inflation to the U.S. economy seems odd. Most U.S. companies still have a hard time making price increases stick, and the Consumer Price Index rose only 1.7% between February 2003 and February 2004.
Daniel Shaffer, president of Shaffer Asset Management L.L.C., White Plains, N.Y., is one of the investment advisors who still worries about prices sinking.
Throughout the world, "we're seeing extreme pressure for deflation, not inflation," Shaffer says.
Shaffer, whose firm manages stock portfolios and commodity investments for profit-sharing plans as well as individuals, says U.S. businesses' sluggish response to short-term interest rates of just 1% shows that the economy continues to suffer from the effects of the 1990s stock bubble.
But others worry that inflation could be creeping back. Federal Reserve officials have held short-term rates at 1%, and the CPI increased at an annualized rate of 6% in February.
Another indicator, the U.S. Dollar Index, a measure that compares the value of the dollar with the value of a basket of 6 other major currencies, shows that the value of the dollar has dropped about 25% since February 2002.
Despite the global pressure for deflation, U.S. consumers probably will see prices go up as businesses respond to the new weakness of the dollar, Shaffer predicts.
Even if the annual inflation rate simply increased to 4% and stayed there, that could throw off some employees' retirement investment strategy, advisors say.
