Deflation Concerns Gaining Traction as Economy Stalls

The consumer price index has fallen for two consecutive months: 0.2 percent in May and 0.1 percent in June.

The unemployment rate in the United States remains at a persistent 9.5 percent, and in July the U.S. shed 131,000 jobs.

Not exactly the type of news that supports a strong recovery or growth story.

As discussed in a recent Wall Street Journal article, some large and very prominent investors are conditioning their investors and structuring their portfolios for deflation.

PIMCO's Bill Gross, for example, says the following:

"Deflation isn't just a topic of intellectual curiosity, it's happening," says Mr. Gross, who runs the $239 billion mutual fund Pimco Total Return Fund, citing an annualized 0.1% decline over the past two years in the U.S. consumer-price index. "It's an uncertain world that's tipping toward deflation."

The inflation-deflation debate presents a challenging decision to retirees who are contemplating any form of fixed income--whether an annuity or a bond.

On the one hand, the value of a fixed stream of income will rise in real terms in a deflationary environment.  Deflation would be welcomed by those who were fortunate enough to lock-in some form of fixed income before the financial crisis and recession took hold.

On the other hand, anyone who is currently deciding whether to pull-the-trigger on an annuity, bond or any other form of fixed income may be locking themselves in at the absolute peak if the deflation threat turns-out to be short-lived or a false alarm.

To complicate things further, certain inflation-adjusted annuities may experience declining rates in a deflationary environment--adding insult to injury for those who paid the additional premium for inflation protection when buying the annuity.

Overall, a very difficult time for anyone seeking income.