Inflation 101 – What to know, what to do
Inflation is perhaps the single-biggest influence on your economic situation. It is not properly understood by many, nor do many people make good decisions in light of it.
Peoples Bank is making the effort to address what may be an important gap in the financial efforts of its customers and others with 4 blog posts. We hope this information is more than instructive, we hope that it is meaningful, helpful. Feel free to write us with your comments, and don’t hesitate to share the link with others.
The first installment will define the term and describe it in real-world terms. Subsequent blog posts will describe what you can do about it (personally), what tools are available to deal with it and how your retirement can be improved by dealing with it.
What Is Inflation and Why Should You Care About It?
Prices: Up, up and away
Inflation occurs when there is more money circulating than there are goods and services to buy. The process is like trying to attend as old-out concert at the last minute; there is more demand for tickets than there are tickets to go around. As a result, tickets may trade hands for far more than their stated prices. When there’s a lot of demand for goods and services, their prices usually go up. The law of supply and demand produces price inflation.
Inflation cuts purchasing power
When some people say, “I’m not an investor,” it’s often because they worry about the potential for loss. It’s true that investing involves risk as well as reward. However, there’s also another type of loss to be aware of: the loss of purchasing power.
Inflation is painful enough when you experience a sharp jump in prices. However, the bigger problem with inflation is not just the immediate impact, but its effects over time. Because of inflation, each dollar you’ve saved will buy less and less as time goes on. At 3% annual inflation, something that costs $100 today would cost $181 in 20 years.
|Now||In 20 years|
|Gallon of Milk||$3.81||$6.81|
|Note:If inflation averaged 3% annually,everyday objects could cost much more in the future.|
How is inflation measured?
- The Consumer Price Index (CPI). The most widely quoted inflation measure, this tracks the price change from month to month of a basket of goods and services used by the average consumer.
- Personal Consumption Expenditures(PCE). This statistic adjusts for the fact that rates, the Federal Reserve Board takes into account so-called core PCE (which excludes food and energy because their prices can vary dramatically from month to month).
- Producer Price Index (PPI). This measures inflation from the standpoint of sellers rather than consumers.
How high is high?The average inflation rate as measured by the CPI has been roughly 3% since 1914. Since the early 1980s, it has remained relatively stable, usually between 1.6% to 4.6% annually. However, the inflation rate has varied much more dramatically in the past. During the Great Depression, it often ran in the negative numbers. The country actually experienced deflation in 1921, when the inflation rate was -10.8%.
On the other hand, inflation also has been much higher than most of us have ever experienced. Just prior to 1920, the U.S. suffered from four back-to-back years of double-digit inflation. The worst was in 1918, when prices rose by an astounding 20.4%. More recently, in 1979 the annual inflation rate hit 13.3%, driven at least in part by higher gas prices.
Installment 2: How can you fight the Effects of Inflation?
Contact our Peoples Investment Services, Inc. representative at 828-464-5620 or www.raymondjames.com/PeoplesInvSvcs.
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Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2013