The US Bureau of Labor Statistics released its monthly data for December, indicating that the Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2% in December, on a seasonally adjusted basis, after rising 0.3% in November.
The last 12 months have seen a 2.3% increase in all items indexes before seasonal adjustment. This was larger than the 1.9% rise in 2018, and the largest advance since 2011, which saw a 3% increase.
The price of gasoline, medical care, and shelter all increased in December, which accounted for the rise in the seasonally adjusted all items index.
(Source: US Bureau of Labor Statistics)
The Energy Index
The energy index rose 1.4% in December, marking its third consecutive monthly increase. Gas prices increased 2.8% in December (yet before seasonal adjustment, the price of gasoline fell 1.6%). The natural gas index also increased 0,3% in December, likewise marking it third consecutive monthly rise. Conversely, electricity decreased slipping 0.5% in December.
Over the past 12 months, the energy index saw a 3.4% increase. The price of gasoline rose 7.9% and the fuel oil index also increased 4.6% over the past year. Yet, electricity fell 0.4% and the natural gas index decreased 3.5%.
All Items Less Food And Energy
The index for all items less food and energy edged up 0.1% in December, after rising 0.2% in both the previous months. The shelter index increased 0.2% in December. Both in the indexes for rent and for owners’ equivalent rent rose 0.2%, respectively. The medical care index also increased 0.6% in December.
Overall, the index for all items less food and energy increased 2.3% over the past 12 months. The shelter index increased 3.2% over the past year, and the medical care index likewise increased 4.6%.
(Source: US Bureau of Labor Statistics)
The Food Index
In December, the food index rose 0.2%, after edging up 0.1% in November. The food at home index increased 0.1%, marking the same increase as in November. Additionally, the food away from home index increased to 0.3%.
Over the past 12 months, the food at home index rose 0.7%. Likewise, the food away from home index increased 3.1%.
Overall, the food index rose 1.8%, slightly higher than the 1.6% rise in 2018. Over the past decade, the food index increased at an average annual rate of 1.8%.
By definition, inflation is the general increase in the price of goods and services, and the decrease in the purchasing value of a nation’s currency. Inflation is measured in the consumer price index (or simply CPI), which in turn, calculates the value of a basket of consumer and services purchased by the average household. In this article, 5 experts discuss things you didn’t know about inflation.
I Think A Lot Of People Don’t Really Think About Inflation And Their Money Losing Buying Power
“I think there’s a lot of people out there who either just don’t know about inflation period, or don’t think about it. We all intuitively know things get more expensive over time. A Subway Foot Long used to be $5, now its $8 or $9, things go up in price but I think a lot of people don’t really think about inflation and their money, losing buying power.
I was recently talking to a family friend who left a job of 20 years. They had something like 18k in their retirement account despite making a very good living and having been there 20 years. On the other hand I had been at a much lower paying job for something like 5 years and had over 25k in my 401k. It turned out this family friend wasn’t investing, they were just letting money sit in their retirement account because they were scared of risk and scared of investing. I was trying to explain to them that while all investments have risk, what he’s doing now is guaranteed to lose him money through inflation and over time a pretty substantial amount of money. He didn’t seem to get it and continues to let his retirement money just sit and lose over time.”
John Frigo, Digital Marketing Lead, My Supplement Store
The Word “Inflation” As Originally Coined Applied Entirely To The Quantity Of Money
“The average American does not know or appreciate that the word ‘inflation’ as originally coined, applied entirely to the quantity of money. That is to say, inflation is merely an increase in the quantity of money and bank notes that are in circulation plus the quantity of bank deposits that are subject to check. As such, current operations by Central Banks around the world that electronically create ‘money’ or ‘reserves’ through open market operations and programs such as ‘quantitative easing’ are themselves sufficient to satisfy the original definition of ‘inflation’, even if there is no measurable increase on the price on consumer goods.”
David Reischer, Esq. Banking & Business Attorney, LegalAdvice.com
The Average American Has A Hard Time Even Describing What Inflation Is
“The average American attending my workshops on the basics of personal and household finances knows that inflation is something that can hurt their wallet, but they have a hard time even describing what inflation is.
Many people accept that inflation results in higher prices for goods and services, but they do not understand it as an annual change. Rather, they think of it like they would a sales tax, like something added onto the normal price of goods and services.
The average American knows that prices for gasoline, food and cars were much lower when they were younger, but there is a disconnect between the change in prices and the principle of inflation.
The simplest description of inflation I see my adult students understanding is this: You know how prices seem to go up year after year? That is inflation.
Most adults in my classes typically guess that inflation is far higher than it is, believing it is close to 10% a year rather than the 2.5% to 3.5% rate is has been for the past couple decades. However, even at 3.5%, they do not understand that prices will actually DOUBLE in just twenty years. The Rule of 72 is a powerful tool for teaching about the impact of inflation over time.”
Todd Christensen, Education Manager, Money Fit by DRS
The Correlation Between Interest Rates And Monetary Inflation
“Very few people understand the correlation between interest rates and monetary inflation. When interest rates are suppressed below the GDP rate, which is a reflection of economic output, then interest rates anywhere in the interest curve below this rate results in people being paid to borrow. This is because the rate of interest is below the rate of monetary inflation and thus people are encouraged to expand in ways that are not necessarily economic. To that end, assets that are tied to the interest rate complex largely rise in price as interest rates are lowered.
While the apparent gains in value for assets tied to interest rates like real estate, bonds, commodities, collectibles, may seem engendered by real market demand, in most cases the demand is artificially being created by inflation tied to below market price interest rates. Central Bank meddling in the pricing mechanism for interest rates, which some would say is the most important price in a free market, distorts all markets and that’s why many assets are highly susceptible to the boom-bust cycle of bubbles.”
Brian Ma, Broker, Flushing Real Estate Group
Investing In Real Estate Is The Best Hedge Against Inflation
“One of the most important things which the average American does not know about inflation is that investing in real estate is the best hedge against it. While people are generally aware of the many benefits of real estate investments such as relatively low risk and monthly rental income, they often fail to appreciate the fact that investing in real estate properties protects one’s money against inflation. While housing markets take temporary downturns as a result of economic and demographic factors, they always bounce back. Regardless of which market you look at, real estate prices follow an upward trend in the medium and long term. This is due to the constant increase in housing demand (due to population growth) and the fact that the land on which properties are built is a very limited resource. If we look at data from the past few decades, the average annual appreciation rate in the US exceeds the average annual inflation rate. In 2020 inflation in the US is forecast to reach about 2%, while the increase in the median home value is expected to reach about 2.2%. This means that once again the real estate appreciation rate will exceed the inflation rate, offering investors protection of their financial resources.”
Daniela Andreevska, Marketing Director, Mashvisor
Unfortunately, inflation is an economic reality that is unavoidable. You can keep abreast of the monthly inflation rates and the CPI via the Bureau of Labor Statistics release schedule. The best strategy to hedge against inflation is to ensure that one has a diversified portfolio.
The US Bureau of Labor Statistics released its monthly data, stating that the Consumer Price Index for All Urban Consumers (CPI-U) rose 0.3 % in November on a seasonally adjusted basis, after rising 0.4% in October.
Despite historically low unemployment coupled with tariffs on Chinese imports, this signals that inflation remains in check.
American households paid more for energy, food, rent, and healthcare in November.
Source: US Department of Labor
The Energy Index
The price of gasoline increased by 1.1%, and the other major energy component indexes also increased 0.8% in November. Other major energy categories also saw an increase, with electricity edging up 0.3% and natural gas increasing 1.1%.
Over the past 12 months, the energy index has decreased 0.6%. Gasoline prices declined 1.2% over the past year, and the fuel oil index fell 6.7% over the past 12 months. Conversely, the natural gas index rose 1.1% and the electricity index increased 0.5% over the year.
The Food Index
Food prices edged up 0.1%, rising for a third straight month, with the categories for both food at home and food away from home both increasing over November.
Food at home increased 0.1%, after seeing a 0.3% increase in October. Likewise, the food away from home index increased 0.2%.
Over the last 12 months, the food at home index increased 1.0%. The food away from home category also increased 3.2% over the past 12 months.
Source: US Department of Labor
All Items Less Food And Energy
The shelter index rose 0.3% in November. The index for rent also rose 0.3%, while the index for owners’ equivalent rent increased 0.2% over the month. Over the past 12 months, the index for shelter has increased 3.3%. The medical care index increased 0.3 percent. Over the past year, the index for medical care rose 4.2%.
Overall, the index for all items less food and energy rose 2.3% over the past 12 months.
Considering that precious metals such as gold have enjoyed a bullish market, there’s no better time than now to invest. An easy way for investors to keep abreast of the price of the glittering metal is with a gold calculator. The question that arises is gold and inflation. In this article, 4 experts discuss whether gold is a good inflation hedge.
Gold Might Be A Valuable Addition To A Portfolio, But Not Because It Is A Good Hedge Against Anything
“In times of economic uncertainty, many advisors suggest gold as a hedge, especially against inflation. In other words, the expectation is that holding gold in the portfolio will compensate for other assets declining in value. Luckily, we don’t need to leave this question to opinion. Instead, we can answer it based on quantifiable facts.
The Federal Reserve Bank of St. Louis maintains a site nicknamed FRED, providing time series of almost any aspect of the U.S. economy. As a measure of inflation, we can use the Consumer Price Index for All Urban Consumers.
By dividing the gold fixing price by the consumer price index, we can inflation-adjust the gold price. With the data available on FRED, we can do so back to 1968. If gold was a good hedge against inflation, we should see the resulting chart continuously trend up.
Unfortunately, this is not what we see. Instead, we can identify the following course periods:
– from 1968 to 1980, gold was by far outperforming inflation
– after 1980, gold prices fell by 75%, and it took until 2011 for prices to recover
– from 2011 to 2015, inflation-adjusted gold prices fell by 30%
– since 2015, gold prices have been mostly flat
Interpreting these results, we find that over the 50-years from 1968 to 2019, gold prices rose about six times faster than inflation. This single finding supports the idea of gold being a good hedge against inflation. However, there have been long periods of underperformance: for about half the time throughout the past 50 years, gold prices were not only lagging inflation but declining at high rates.
In summary, we believe that gold might be a valuable addition to a portfolio, but not because it is a good hedge against anything. Instead, gold can have a place in an investor’s portfolio because its price is mostly uncorrelated to any other economic factor. However, investors considering gold should have a long investment horizon, and only allocate a small percentage of their funds to gold.”
Felix Bertram, Owner, Investment Adviser Representative, Bertram Solutions LLC
Since The US Dollar Is Based On Gold, That Makes Gold A Good Inflation Hedge
“Since the US dollar is based on gold, that makes gold a good inflation hedge because if the US starts printing too much money and dollars lose their value, anyone who has gold will retain its value even if the dollar becomes worthless from over-printing and inflation.”
Stacy Caprio, Deal Scoop
Gold Isn’t A Hedge Against Inflation
“Gold isn’t a hedge against inflation. It’s a hedge against volatility.
Gold peaked in the early 1980s and then declined for many years. Inflation grew while the price of gold fell. When the price of gold reached its nadir, the stock market was booming in the late 1990s. Then, as the markets corrected in the early 2000s, gold began its ascent. The price of gold seems to do well when people are not making money in financial markets and not when inflation is actually rising.”
Holmes Osborne, CFA, Osborne Global Investors
You Never Really Know What Is Going To Be An Inflation Hedge Until After The Event
“Up until 2007 the gold price largely tracked the increase in Federal Debt, but since then the relationship has largely broken. Initially, the gold price outperformed the increase in US debt, but more recently, it seems to have underperformed.
The million-dollar question being why? And will all this money printing lead to inflation.
With bonds yields being so low, invariably negative, you’d expect inflation. But it’s not happening. One would also expect gold to do well – let’s say, better than it has. But that clearly has not happened.
But is that about to change?
At Mines & Money last week I spoke with a portfolio manager at a US pension Fund. Although I know he’s always been an advocate of gold, he told me that more and more fund managers were looking at the yellow metal. Increasingly viewing it as a “safe haven asset”.
This does not seem to have fed into the gold market yet, but that doesn’t mean it won’t. Time to take a look at the history books.
Appreciate they 1970’s was a long time ago, but if you compare the bull market back then, with the one we’re in now, two things really jump out at you.
Firstly, how the gold price over the past 20 years or so has largely mirrored what happened in the 1970’s and secondly, if the gold price were to take off AND history was to repeat itself, the gold price could go A LOT HIGHER.
Right now, with the increasing debt and general uncertainty in the World across the World, do you think it’s ridiculous to have at least 1% of your wealth in gold? I don’t
You never really know what is going to be an inflation hedge until after the event. But right now, I think gold should be part of a solution – not THE solution. Because I don’t think there is A solution.”
Simon Popple, Brookville Capital
Taking into account the current uncertainties and volatility apropos of the global economy, gold is a good addition to a diversified portfolio. For those US investors interested in investing in gold with an IRA, have a look at the top Gold IRA companies. In addition, for those who already own gold and are considering storing it offshore, have a look at the top companies for your offshore gold investment.
Inflation is a general increase in the price of goods and services, and a decline in the value of a nation’s currency. Conversely, deflation is a decrease in the price of goods and services, when the rate of inflation falls below 0%. Additionally, the purchasing power of a nation’s currency will increase during deflation. Inflation is measured by the consumer price index (CPI). The CPI measures the changes in the value of a basket of consumer goods and services purchased by households. In this article, financial experts share their views on whether or not investors should be worried about inflation and deflation.
This Inflation Or Deflation Debate Mixes A Lot Of People Up Because The Same Causal Forces Can Potentially Lead To Both Scenarios
“This inflation or deflation debate mixes a lot of people up because the same causal forces (such as high debt levels) can potentially lead to both scenarios depending on the policy response.
When analyzed in isolation, the current macro environment is deflationary. Debt levels as a percentage of GDP are beyond the point of sustainability, and aging demographics lead to slower economic growth and a larger financial burden on younger generations, leading to high default risk over the next decade. Debt defaults involve the destruction of both liabilities and assets; other peoples’ money, which makes this an extremely deflationary prospect.
However, there is virtually no way that the global financial system, as currently structured, would allow a deflationary debt default to occur in countries that control their own currencies. Historically, the policy response to economic environments with this high of a debt load is for governments and central banks to print their way out of it. In a purely fiat system, there’s nothing stopping financial authorities from increasing the money supply to pay all obligations in nominal terms, even if it causes inflation and fails to pay back those obligations in true purchasing power terms.
Therefore, a deflationary or dis-inflationary environment is possible in the intermediate-term, but an inflationary outcome is almost inevitable over the long term due to the policy response to those deflationary or dis-inflationary forces. Rarely in history do fiat monetary systems allow themselves to default nominally.”
Lyn Alden, founder of Lyn Alden Investment Strategy
Looking Forward Over The Next 12 Months We Do Expect A Dip In The Markets And Some Inflation
“In an inflationary environment the value of money decreases, which spurs consumption and investment. Deflation makes it profitable to simply sit on one’s savings while the value of those savings increases without any special effort, disincentivizing consumption and investing.
Looking forward over the next 12 months we do expect a dip in the markets and some inflation. Therefore we are therefore poised and ready for investment opportunities that may crop up over this period.”
Robin Lee Allen, Managing Partner, Esperance Private Equity
The Commonly-Cited CPI Metric Might Not Be The Best For Practical Purposes
“Sensing you will likely receive numerous responses to your prompt declaring whether investors should worry about potential inflation or deflation, I thought I would offer up a viewpoint about why the commonly-cited CPI metric might not be the best for practical purposes.
The Consumer Price Index (CPI) has long served as the foundational inflation measure for economic activity. In fact, it underpins the health of an economy because a stable CPI measure indicates opportunity for economic prosperity. Absent predictable CPI readings, consumers will not have an accurate signal about price expectations and may change their behavior in detriment to the economy as a whole.
One major limitation to the current CPI measure is its inability to incorporate decisions consumers might actually make when evaluating a fixed basket of goods. For example, when a price increases for one consumer product included in the selection of goods used to measure CPI, many consumers would choose to switch to a substitute. CPI doesn’t account for this reality. Instead, CPI assumes the consumer would simply pay more for the same product. Reality usually shows a different response in the form of choosing a substitute product.
Instead, a better measure, which accounts for this substitution effect would be “chained CPI.” This more closely resembles the substitution decisions consumers would make in response to rising prices of certain items as opposed to simply paying more for the same good. This metric will capture the switching dynamic.”
Riley Adams, CPA
A Cost-Averaging Strategy Into A Healthy, Low-Cost, Diversified Stock Portfolio
“For anyone investing in their future over the long term, they know that everything moves through cycles. There are booms, and there are recessions. Sometimes the latter morph into depressions. And inside these, there are deflationary and inflationary times. Piecing it all together, unless you are an econometric expert, is almost impossible.
The problem is that events in the economy can move fast between inflationary and deflationary forces. Reaction time can be a severe challenge. For the everyday, hard-working American who puts some earnings aside at the end of every month and religiously injects it into a portfolio, keep it up. By cost averaging over time, you automatically smooth out the many ragged edges and the volatility shocks. Then, my recommendation is to invest it in the S&P 500 (a low-cost fund) that evenly spreads every invested dollar over the public markets’ best stocks. By so doing, you are trusting growth stocks and companies immersed in unearthing and refining commodities like gold and platinum (inflationary hedges). Also, defensive stocks like businesses in consumer goods, and well-known dividend-paying stocks (deflationary hedges). You may want to put a small percentage outside the S&P 500 fund into Treasury Inflation-protected treasuries, investment bonds, and keep some cash on hand (both deflationary protectors).
In short, I recommend a cost-averaging strategy into a healthy, low-cost, diversified stock portfolio as the spearhead of a balanced approach to counteract market ups and downs, rollicked by inflation and deflation from within.”
Gordon Polovin, finance expert, serves on the advisory board for Wealthy Living Today
It’s Definitely Something That People Should Be Concerned About
“Central Banks around the world have a target to keep inflation at roughly around 2% (depending on the country this can be higher or lower). Anything more or less than that can be harmful to the economy. If the inflation is too high, prices of goods and services will rise sharply, and the value of cash or bonds will fall. This has happened numerous times in countries like Germany (after the war), Argentina, Zimbabwe etc. Things can get so bad sometimes that prices double every few hours! This is called hyperinflation and Zimbabwe eventually ended up abolishing its currency and instead using foreign currencies as legal tender! Inflation that is too low or negative (deflation) is equally dangerous. It essentially means that good and services will be cheaper tomorrow than they are today. This incentivizes hoarding of cash. With less demand, economic growth slows down and businesses begin to suffer. Inflation levels also impact export competitiveness compared to other countries, foreign investments and can also impact the value of personal or national debts. It’s definitely something that people should be concerned about which is why Central Banks have set targets in the first place.”
Gaurav Sharma, Founder at BankersByDay
Deflation Can Mean A Drop In Wages Or A Drop In Market Prices
“Deflation can mean a drop in wages or a drop in market prices. Not everyone experiences these drops equally and those who are already secure in a higher paycheck won’t notice either of these factors. However, those who are at the bottom of the business have something to worry about. They are likely to experience a cut in hours or a cut in pay, meaning that while they might notice a drop in market prices, they won’t have the additional income to appreciate it. It’s also important to consider that people are constantly looking for a better deal. In the hopes of finding this deal, people will often stop buying and wait. This can cause a dip in sales and cause trouble with the economy.
Inflation doesn’t necessarily make people secure, however. Inflation means a bump in prices, meaning that the dollar in your pocket is worth less than it was before inflation. Now your paycheck doesn’t go as far and you’re concerned about that. You’ll have less for superfluous spending. You’ll hold onto what little wealth you have and as a result the economy will start to dip.”
Chane Steiner, CEO, Crediful.com
The Outlook Right Now Looks Like One Of Slower Inflation And Because Of That The Risk Of Deflation Is More Of A Concern Now
“Currently the outlook right now looks like one of slower inflation and because of that the risk of deflation is more of a concern now than that of inflation. There are a number of reasons for slower inflation including an aging demographic, technology advancement, inflation expectations, and a stronger dollar. Studies have shown that the aging of demographics has a negative correlation for inflation. In other words, that as a population ages, inflation starts to fall. A good example of this would be Japan, which has battle very low inflation for around the last 25 years. Technology advancement has brought down the price of goods that use new technologies intensively. Historically there has been a correlation of higher productivity with lower inflation. Productivity has been lower recently ,so unless this changes this could be a reason why we start to see inflation rise.
Next, inflation expectations is an important factor in inflation. The higher people think prices are going to go, the more workers will want higher wages, and the higher businesses will believe their costs, and the prices they can charge, will rise. The opposite is true as well, as we are currently seeing inflation expectations from that of the University of Michigan as well as the break-even inflation rate set in Treasury inflation-protected securities. Finally, the stronger dollar leads to lower inflation. This happens because a strong dollar makes foreign imports cheaper which in turn result is cheaper products at U.S. stores, and those lower prices translate to low inflation. So, in order to see the inflation outlook change, we would need to see changes in these factors in order to make that happen.”
Scott Pederson, Financial Advisor, Harmony Wealth Managment LLC
Investor Should Be Worried About Inflation And Deflation
“Yes, the investor should be worried about inflation and deflation. These both are the major economic factors, and investors should keep them in mind before investing money.
Inflation means the increase in the price of products and a decrease in the value of money value. Regarding this basic rule, investors should invest in products whose return or profit margin would be higher than the inflation rate. For example: If the investor is investing $100 and is expected to get $2 profit next year. He must see what would be the inflation rate. If it would be 3%, then the investor is at a loss of $1.
In times of deflation, investors should preserve the capital or invest in the good having the high return potential in the future. Investment in gold is recommended because no matter what, even after a minimal decrease, its prices go high. So, the rule of thumb is either to preserve the capital or invest it in the products with the potential of higher ROI. Business bankruptcy rates increase during this period. So, do not keep your stock shares or corporate bonds in the companies having the risk of bankruptcy. Instead, invest them in potential business or goods to remain on the safe side. “
CJ Xia, VP of Marketing & Sales at Boster Biological Technology
Both Have Negative Consequences
“Generally, as the economy recovers, banks are able to loan out their excess reserves to the public. With the increase in money supply, inflationary pressure is also built, causing the prices of goods and services to rise. This worries ordinary citizens, especially those who live pay check-to-pay check because the affordability of basic goods and services is more difficult.
On the other hand, deflation impacts consumers by way of raising their purchasing power since goods and services have become more affordable. But while this may be good news to the public, the same thing cannot be said for enterprises who are affected by the low prices of their goods and services. Eventually when deflation persists, they will be forced to cut jobs and shut down. The public then experiences decline in incomes and therefore, consumer confidence plunges.”
Doug Keller, Writer, Finance Fox
Both inflation and deflation are economic components that unfortunately cannot be avoided. Keep up with monthly inflation rates and the CPI via the Bureau of Labor Statistics release schedule. In order to offset the market ups and downs during periods of inflation and deflation, a diversification strategy for one’s portfolio is the best bet.