If you ask investors about their biggest fears today, rip-roaring inflation probably wouldn't top the list. After all, prices have been sluggish for years, with the Consumer Price Index up only 1.1 percent over the last year.
But the winds may be changing: Several forces — including wage growth, a weaker dollar and a rebound in oil prices — suggest inflation could very well be on the horizon, and investors should pay attention.
Indeed, while demand for Treasury Inflation-Protected Securities (TIPS) has risen in recent months, the 10-year breakeven rate is around 1.6 percent, below both historical levels and the Federal Reserve's 2 percent target. The rate represents the difference between what conventional and inflation-linked 10-year Treasuries yield, and serves as a proxy for investors' inflation expectations.
In other words, it seems investors could be underestimating the risk of inflation.
While perhaps not as much of a steal as back in February — when the breakeven was 1.2 percent, the lowest it has been since 2009 — TIPS remain a good deal, said Morningstar fixed income analyst Brian Moriarty.
"TIPS are still looking cheap relative to history," Moriarty said.