Prime Highlights

• The $2 trillion inflation-linked security market is vulnerable as confidence in official U.S. economic statistics erodes.
• Investor concerns are growing over possible political meddling with inflation and employment data.

Key Fact

• Treasury Inflation-Protected Securities (TIPS) are valued on Consumer Price Index (CPI) data.
• Unexpected change at the top of the Bureau of Labor Statistics (BLS) has contributed to skepticism in the market.

Key Background

The $2 trillion market value of Treasury Inflation-Protected Securities (TIPS) is beginning to appear precarious in the face of increasing doubt about the validity of U.S. inflation data. TIPS are indexed to the Consumer Price Index directly, and therefore their value rests on unimpeachable and objective reporting. TIPS are now among the first securities to suffer if government-reported inflation data continues to lack trustworthiness in the minds of investors and financial analysts.

Concerns were raised after the abrupt firing of Erika McEntarfer, director of the Bureau of Labor Statistics, after a comparatively modest jobs report. President Trump then publicly condemned the move in severe language, accusing the employment figures of being “rigged.” It has sent shock waves through the investment community that has historically had a high degree of faith in the BLS as an objective and reliable institution. The realization that political considerations can now impact the CPI data introduces a new dimension of risk into the inflation-linked securities market.

Early market reaction was choppy, with U.S. stocks, Treasuries, and the dollar falling before partial stabilization. Investors started to price in this risk of suspect proxies for forward-looking economic data and, consequently, central bank policy decisions. TIPS, as a large inflation hedge, is particularly vulnerable to such forces and therefore serves as a proxy for general market sentiment.

Adding to the problem are agency ailments at U.S. data agencies: aged methods of collecting data, poor survey response rates, and persistent underfunding. These persistent problems have put agencies such as the BLS in greater jeopardy from both internal and external pressure. Unless thorough reforms are enacted to safeguard and rejuvenate economic data infrastructure, the integrity of inflation-indexed markets will further erode, putting trillions of dollars in investment at risk.