Investors are getting defensive about inflation

·2 min read

Data: U.S. Bureau of Economic Analysis; Chart: Dion Rabouin/Axios Visuals

The record 21.2% increase in Americans' personal income in March was notable not only for its rise but for its causes and outcomes.

Between the lines: The Bureau of Economic Analysis pointed out in its monthly report on income and outlays that the increase in personal income "largely reflected an increase in government social benefits."

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  • But rather than spend their stimulus checks and enhanced unemployment benefits, most Americans chose to put the money away, with the U.S. personal savings rate jumping to 27.6%, edging back toward the all-time high set in April 2020.

Watch this space: Spending, on the other hand, rose by a "relatively tame" 4.2% in March, notes AllianceBernstein senior economist Eric Winograd.

Between the lines: That should translate into more spending in the second quarter, Winograd says, and that data already is playing out in inflation metrics like personal consumption expenditures and the consumer price index.

  • Both showed not just significant year-over-year rises but surprisingly strong month-over-month readings for March (0.4% for the Fed's favored core PCE reading).

  • "With the demand side of the economy in strong shape and the supply side still constrained by production bottlenecks and capacity limitations, we should expect inflation to continue rising for the next few months," Winograd says in a note to clients.

  • "The Fed also expects that, and they view those increases as likely to be transitory. I agree with that assessment, but of course it will be several months before we can be certain."

In the meantime: Investors have been loading up on inflation protection, data from Refinitiv Lipper show.

  • Inflation-protected bond funds saw record inflows in the first quarter that that was more than 10 times the quarterly average ($19.2 billion in Q1 vs $1.7 billion average dating back to 2003).

  • Inflation-protected bond funds saw net outflows this past week for the first time in 28 weeks, ending the longest streak since the start of 2008 where they witnessed 70 straight weeks of inflows, notes Jack Fischer, Refinitiv Lipper's senior research analyst.

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