For most of the twenty-five years prior to 2020, low inflation was the norm in the US (and in most developed economies). PCE* inflation, the Fed’s preferred measure for inflation, spent most of that time below 2%. In fact, in the aftermath of the Great Financial Crisis (GFC), deflation was the chief worry of policymakers. Other factors that contributed to the exceptionally low inflation data include:

• Globalization, which allowed businesses to reduce costs by sourcing labor and materials abroad;
• Slow GDP growth, particularly after the GFC since financial crises result in more sluggish and gradual recoveries which made it challenging for businesses to raise prices;
• Less investment spending by businesses following the GFC, which also kept GDP growth in check;
• Credibility of the Fed as an inflation-fighting central bank, which fostered low inflation expectations and became a self-fulfilling prophecy until 2021;
• New business models exemplified by Amazon which intensified retail competition and put real-time pricing information in the hands of consumers like never before.

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Although a bond’s face value does not change, its market price can move up and down nearly every day from changing interest rates. It’s important to note that bonds with longer maturities typically offer higher yields but are more susceptible to interest rate risk. On the flip side, bonds with shorter maturities tend to be less susceptible to interest-rate risk but offer lower yield.

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