The US Bureau of Labor Statistics (BLS) reported today, that in January, the Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1% on a seasonally adjusted basis. The all items index has risen 2.5% before seasonal adjustment, over the past year.
Based upon the data provided by the BLS, the shelter index was the largest component, which attributed to the rise in the seasonally adjusted all items index. In addition, the medical care and food indexes also increased. Conversely, the energy index dropped in January.
(Source: US Bureau of Labor Statistics)
In January, the index for energy decreased by 0.7%. This is in contrast to December when the energy index edged up 1.6%. The price of gasoline dropped 1.6% in January, compared to the 3.1% rise the previous month. The electricity index edged up 0.4%, as did the natural gas index, with an increase of 1.0%.
Overall, over the past 12-month period, the energy index rose 6.2%. The price of gasoline soared up 12.8% since January 2019. The index for electricity edged up 0.5%, while the natural gas index dropped 3.2%.
Similarly to December, the index for food rose 0.2%. The food at home index also increased 0.1% in January. The food away from home index also edged up 0.4%.
Since January 2019, the food at home index rose 0.7%. Likewise, the food away from home index also increased 3.1% over the past 12 months.
(Source: US Bureau of Labor Statistics)
All Items Less Food And Energy Index
In January, the index for all items less food and energy rose 0.2% – December saw an increase of 0.1%. As mentioned, the shelter index increased 0.4%. The owners’ equivalent rent index saw a 0.3% increase, and the index for rent rose 0.4%.
The index for medical care also increased by 0.2%, as did the hospital services index, which rose 0.8%.
Over the last 12 months, the all items less food and energy index increased 2.3%. Since January 2019, the index for shelter edged up 3.3%. The medical care index also saw an increase over this same period, rising 4.5%. Over the past 12 months, there have been few indexes that decreased in this category.
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.
Inflation is a general increase in the price of goods and services, and decrease in the purchasing value of a currency – essentially, it is measuring the temperature of the economy of a country. In addition to the broader implications of inflation on the economy of a country, it also affects one’s personal finances. Inflation is measured by the consumer price index (CPI). The CPI reflects the value changes in a basket of consumer goods and services, which are often adjusted to factor consumption patterns of the average consumer. Yet many people don’t consider the impact of inflation on future financial planning, seeing as the average American doesn’t keep up with inflation. It is something that should always be taken into account, especially when it comes to investments that will provide retirement income. Here are the 4 effects of inflation on your personal finances.
(Source: The Bureau of Labor Statistics)
The Effects Of Inflation On Your Savings
Inflation affects specific aspects of one’s personal finances differently. One area that is perhaps most susceptible to inflation are cash investments like a savings account. Because money is readily accessible, some people prefer to keep it in a savings account rather than invest it. Yet, as time passes, the value of money kept in a savings account can lose its value, considering that prices generally increase in the future. What you could purchase with $20,000 25 years ago, isn’t the same as the value of $20,000 today in 2019. In essence, the purchasing power of money may decrease while it sits in a savings account at a bank.
For instance, if a savings account contains $1,000 with an interest rate of 1%, by year’s end the account will have $1,010. If the rate of inflation is running at 2%, then there must be $1,020 in the account to have the same purchasing power that was started with. It’s important to remember, that interest gained in a savings account never keeps pace with the rate of inflation.
In essence, inflation will eat away at one’s purchasing power, because not only will the money lose value, it won’t gain anything either. This can be a cause for concern during retirement when you have less earning power. To protect the purchasing power of your savings from the rate of inflation, it would have to grow at or beyond the inflation rate. An effectual way to beat the effects of inflation on your savings is to invest some of those savings in the stock market.
The Impact Of Inflation On Stocks
Investing money in the stock market inevitably comes with a higher level of risk than simply keeping money in a savings account. Yet, as time passes, the stock market is expected to be able to handle or exceed the rate of inflation. Because of this fact, some investors prefer to invest their money in potentially higher growth investments like stocks. For those who prefer to avoid the volatility of individual stocks, another option is mutual funds, which usually provide good returns and are professionally managed. Furthermore, index funds might be an even better alternative for some, as they aren’t reliant on a fund manager, and follow their benchmark financial market index.
However, apropos of stocks, inflation still affects the value of the investment. The value of a stock is dependent on the performance of a company. When the economy is strong, inflation is usually high. During these periods, a company may have increased revenue and earnings, which would help their share price. However, as inflation rises, the company would have a larger expenditure for things like wages or raw materials – thus, affecting the company’s value. Additionally, akin to any other return, the stock’s return value will decrease as purchasing power decreases over time.
1979 $10,000 Treasury Bond (Photo: Wikipedia)
The Effects Of Inflation On Bonds And Treasury Bills
Debt securities like bonds and Treasury bills are fixed-income assets that payout the same amount each year. These assets are not as affected by inflation as money in a savings account. However, when the rate of inflation increases faster than the return on debt securities, their value depreciates. Earnings diminish as purchasing power declines with the rate of inflation.
One option, especially for those in their retirement years, is Treasury Inflation-Protected Securities (also referred to as TIPS). These forms of inflation-protected bonds are indexed to inflation, therefore protecting investors from the adverse effects of increased prices.
Property Ownership And Inflation
Property ownership is perhaps the most beneficial during periods of high inflation. As inflation increases, so does the value of the property. If you have a fixed-rate mortgage on a property, then the cost of the monthly mortgage payments will decrease as time passes.
However, because most people purchase properties with mortgages, higher interest rates could dissuade people from increasing their debt-load. Therefore, the demand for property decreases, making it more difficult to resell.
(Photo: REUTERS/Carlo Allegri)
Warren Buffet And The Matter Of Inflation
Preeminent investor Warren Buffet has long been a leading authority on inflation, as he is both focused on and fearful of it. In fact, lest it be forgotten, that prior to the financial crisis of 2008, Buffet, the CEO and chairman of Berkshire Hathaway warned that inflation would cause a collective upset – which it did.
In 2010, after the world was wrestling with the effects of the financial crisis, Buffet wrote a “tongue in cheek” thank you note to the US government.
“We are following policies that unless changed will eventually lead to lots of inflation down the road,” Buffet stated on an op-ed.
In his classic piece for Fortune in 1977, aptly titled How Inflation Swindles the Equity Investor Buffet succinctly outlined his views about the effects of inflation on investors.
“It is no longer a secret that stocks, like bonds, do poorly in an inflationary environment. We have been in such an environment for most of the past decade, and it has indeed been a time of troubles for stocks. But the reasons for the stock market’s problems in this period are still imperfectly understood.
There is no mystery at all about the problems of bondholders in an era of inflation. When the value of the dollar deteriorates month after month, a security with income and principal payments denominated in those dollars isn’t going to be a big winner. You hardly need a Ph.D. in economics to figure that one out.
It was long assumed that stocks were something else. For many years, the conventional wisdom insisted that stocks were a hedge against inflation. The proposition was rooted in the fact that stocks are not claims against dollars, as bonds are, but represent ownership of companies with productive facilities. These, investors believed, would retain their value in real terms, let the politicians print money as they might.”
Despite the fact that Buffet wrote this 42 years ago, certainly words of wisdom from an individual who is legendary for his investing prowess and sagacity pertaining to finance.
Planning For Inflation
Inflation is a financial component of life that cannot be avoided. However, there are things that can be done. Keep abreast of monthly inflation rates and CPI, via the Bureau of Labor Statistics release schedule. If inflation goes above the 3% level, it could be an indicator of worse things on the horizon. Factor in inflation when investment planning, especially with regards to fixed-income investments. Lastly, when planning for retirement, expect that the rate of inflation will be exponentially higher in the coming decades, rather than decreasing. Also, keep abreast of the market value of gold with a gold calculator. All are good ways to protect your personal finances from the possibility that the rate of inflation increases.
We conducted a survey asking 1,500 US respondents whether or not they kept abreast of inflation. We used Google Surveys and targeted males and females between the ages of 18 to 65+ from coast to coast. We asked the following question with three possible responses:
Do you keep up with inflation?
- I don’t even know what inflation is
The Average American Woman Does Not Keep Up With Inflation, Especially 18 to 24-year-olds
The overwhelming response of Americans, who took part in the survey, indicated that they did not keep up with inflation. A full 56.1% chose this response.
When demographic filters were applied to the survey results factoring females, very compelling insight was discovered. The percentage leaped to 63.6% and skyrocketed to an astounding 75.1% of females between 18-and 24-years-old.
Conversely, when demographic filters targeted specifically males, 48% stated that they did not keep abreast of inflation. Of the males between 18 and 24 who responded to the survey, 59.8% chose this option.
One possible explanation for the drastic variance of the percentage between genders could be the finance sector. Although blessedly changing, positions across the spectrum of finance and business have typically been held by males – thus, making a larger percentage of males more inclined to keep up with inflation.
Males Are More inclined To Keep Abreast Of Inflation, Especially Middle-Aged Males
The second most popular response to the survey was 30.9% of respondents indicated that they did, in fact, keep up with inflation.
Yet, when demographic filters were applied focusing specifically on gender, 38.9% of male respondents stated that they kept up with inflation, while conversely, 23.5% of female respondents selected the same option.
When the demographic filters targeted middle-aged males between 45 and 64-years-old, the results soared to 42%. Because almost half of this cohort indicated that they kept up with inflation, they have the highest percentage of respondents who answered “yes” to the survey question.
These results could further be demonstrative of the fact that males, especially middle-aged males, populate a higher percentage of positions across the spectrum of finance and business, which would warrant them keeping up with inflation.
American Women Between 25 and 34-years-Old Indicate That They Don’t Know What Inflation Is
Of the American respondents who participated in the survey, 13% indicated that they didn’t even know what inflation was.
Yet, interesting insight was discovered when demographic filters were applied to the results, targeting specifically gender. 13.1% of male respondents indicated that they did not know the definition of inflation, while 12.9% of female respondents chose the same response.
However, when demographic filters focused specifically on females between 25 and 34-years-old, 18.6% of this age bracket indicated that they didn’t know what inflation was. Thus, it was the second most popular response to the survey question for this demographic.
Based upon the results of this survey, more than half of all Americans who responded did not keep abreast of inflation. Although a higher percentage of males who participated indicated that they did not know the definition of inflation, the highest percentage of respondents who did not know what it was were females aged 25 to 34. Yet, males, especially middle-aged males, were more inclined to keep up with it. This could be explained by the fact that as a generalization, jobs within areas of finance and business which would necessitate keeping abreast of inflation, are typically dominated by males.
Details About The Study And RMS Score
Annuities are a popular insurance contract that provides guaranteed returns for a set period or for a lifetime. In this article, financial experts discuss whether or not annuities represent a good investment for inflation protection.
Carefully Evaluate Any Annuity And Pay Special Attention To The Inflation Riders And How It is Calculated
“Single-Premium Annuities are not designed to be inflation protection, they are insurance product designed so that you don’t run out of money. Annuities are simply a promise to pay you and income for the rest of your life how long or short that may be. Annuity companies usually offer the opportunity to purchase or not purchase an inflation rider when you purchase one of these contracts. An annuity is not really an investment to protect against inflation because your actual return, that is how many and long you receive payments- is primarily delivered by how long you live!
An inflation rider might be purchased and in this case, inflation might outpace the contract terms and your payment would be adjusted upwards to keep up with the rising costs of goods and you would see your real income keep up with the rising costs. Inflation may be similar to historical averages and your income would be similar throughout the term of the contract.
Currently, we are at near-historic low rates of in inflation and if an example consumer purchased an SPIA and then saw a run-up in inflation, the real income of the annuitant could be significantly reduced. Inflation may be very low and you may have paid a premium for inflation protection, but if the inflation rate was very low you may have been better off not purchasing the option.
This only covers single-premium annuities, there are also period certain annuities, return of premium annuities and many more. The main point is to carefully evaluate any annuity and pay special attention to the inflation riders and how it is calculated, as well as understand the pros and cons of
the contract you are evaluating.”
Jason B. Ball, CFP®, ChFC®, CLU®, Ball Comprehensive Planning, LLC
When Setup Properly Annuities Can Provide A Lifetime Income Stream
“I am an independent insurance broker specializing in annuities – and yes – I believe annuities are a good investment.
When setup properly, annuities can provide a lifetime income stream for individuals and couples. That income stream can also increase each year based on moves in the CPI index. And once the income stream increases, it can’t go back down.
A guaranteed lifetime income annuity that increases payments based on moves in the CPI (or other inflation indexes) can be a valuable piece to any retirement plan. It acts as a pension plan and can reduce the financial strain that comes along with the overall market volatility we’ve experienced the last decade and a half.”
Adam M. Hyers, President, Hyers and Associates, Inc.
Annuities Are A Great Way To Make Sure Your Money Grows
“Annuities are a great way to make sure your money grows at a rate that outpaces inflation. Annuities are also often guaranteed not to go down when the market goes down. This means they are protecting you against losing everything in a crash as well, making them ideal for people who need to have a certain amount of money each month to live on when they are no longer working.”
Stacy Caprio, Financial Blogger, Fiscal Nerd
They Come With Several Costly Caveats That Do Not Make Them Worthwhile For Most Investors
“Annuities are not a great buffer against inflation. They provide guaranteed returns, but they come with several costly caveats that do not make them worthwhile for most investors.
Annuities typically have several fees (including administrative or death benefit costs) associated with them above the cost of investment fund management fees. Inflation-protected annuities have additional fees for this benefit as well.
Annuities payments are not guaranteed. If the insurance company an investor purchased from goes bankrupt, it is possible that the individual might lose their payments.
If the investor decides they no longer want to the annuity, there is usually a penalty fee to cancel it and withdraw the money.
In general, a better strategy would be to invest in low-fee options that return healthy dividends. Over time the stock market historically outperforms what an annuity can offer, so investors with many years to go will do much better putting their available funds into 401K and IRA options than to purchase annuities now.”
Isaiah Goodman, Becoming Financial
Good Investment For Inflation Protection But Should Not Be Used As Pure Inflation Protection Vehicles
“Annuities can be a good investment for inflation protection but should not be used as pure inflation protection vehicles. They should only be used as inflation protection vehicle if the investor has an additional concern such as running out of money too quickly, having a stable income for peace of mind, or having some form of downside protection. Most annuities offer a cost of living adjustment rider which allows the income to scale based on one of the economic inflation metrics. However, annuities are primarily insurance for running out of money too fast. The way this happens is that you either live too long, you can’t budget to save your life, or you panic every time the market gets volatile.
If you don’t think you experience one of these core problems than there are a variety of better investments, you can make to protect your self from inflation concerns. If you are conservative in nature you can buy Treasury Inflated Protection Securities. Not only are they guaranteed by the federal government, but they are very stable investment. Their payments adjust directly based on inflation, so it is a direct hedge for inflation. However, if you want the best inflation-adjusted investments then look no further than the stock market. Equities are the best available investment when it comes to inflation. The cost of your day to day goods will directly be represented in the cost of goods these companies sell.”
Alex Caswell, CFA CFP, Wealth Planner, RHS Financial
Annuities Are A Very Misunderstood Product
“Annuities are a very misunderstood product. Annuities are a popular choice for investors who want to receive a steady income stream in retirement. There are different types of annuities that can play a beneficial part in anyone’s holistic strategy. As an industry professional, I believe that annuities serve a purpose for anyone, and can’t fall into a lump-sum of good or bad.”
Danita M. Harris, Managing Member, Guice Wealth Management
Fixed And Indexed Annuities Will Almost Certainly Beat Inflation With No Risk Of Loss
“Most long-term instruments will likely beat inflation, and therefore are good for inflation protection; however, most individuals who are looking for inflation protection are also just as concerned with the safety of principal and long-term liquidity. Fixed and indexed annuities will almost certainly beat inflation with no risk of loss, offering significantly higher interest rates than most fixed instruments. Additionally, annuities are tax-deferred, resulting in an even higher effective rate of interest. Once the surrender period has expired (usually between about five and ten years), most annuities are completely liquid provided the account owner is age 59.5 or older, unless of course, the account is annuitized (set to pay out a guaranteed income stream, usually for life or beyond).”
Rob Drury, Executive Director, Association of Christian Financial Advisors
It Depends What Type Of Annuity You Choose To Invest In
“I think it depends on what type of annuity you choose to invest in. Inflation can be unpredictable, and since annuities tend to be long-term investments, they may not be the best way to protect your finances from inflation. Even in a fixed annuity, you would guarantee the same amount of capital in return, but inflation could potentially negate any capital gains from this type of investment.
However, you could take out an immediate annuity that would start paying out in the short-term, making it a very viable option. This way you could start receiving your investment in small parts over the course of time, which is better than receiving a lump sum in the distant future. Smaller short-term capital gains will help you hedge against rising inflation, and you can always halt your annuity in the event inflation rises unexpectedly in the future.”
Igor Mitic, Co-Founder, Fortunly.com
It Is Generally Not The Top Of Mind Reason One Would Purchase An Annuity
“Annuities CAN have a place in someone’s overall financial planning for part of someone’s overall assets. Inflation protection could be a component of the reason why one would purchase an annuity, although the more common reasons found involve potential guarantees of income for life and the death benefit…always for additional fees. There are step-up features whereby the income benefit base steps up each year, or where the death benefit base steps up annually…or both. The increasing income base can mitigate the effects of inflation, depending on the specifics of the particular feature. There is not a one-size-fits-all, in that annuities can be tied to the stock market [variable annuity], a fixed rate of return [fixed annuity], or tied to an index [indexed annuity]. The fees can vary depending on the insurance carrier and the ancillary benefits purchased. The distribution options can vary as well, depending on the income need. All of that said, while inflation protection can be a component of the features of an annuity, it is generally not the top of mind reason one would purchase an annuity.”
Jimmy Masters, AIF(r), CRPS(r), Vice President – Investments, The Alcaraz Fisher Justis Wealth Management Group of Wells Fargo Advisors
Although annuities provide guaranteed payments to investors, there is no overall consensus as to whether or not they provide good inflation protection. If you are thinking about investing in annuities, take into account what the financial experts have discussed in this article, and always do your due diligence.
Inflation protected bonds, or more specifically, Treasury inflation protected securities (TIPS) are Treasury bonds designed to protect against inflation. The principle of TIPS rises with inflation, and pays interest twice a year, at a fixed rate. In this article, industry experts discuss specific things investors should know about inflation protected bonds.
Best For Savings Not Investment
“Treasury inflation protected securities are meant to help protect your principal amount from the effects of inflation. Your invested amounts are adjusted regularly in accordance to changes in the consumer price index – the official inflation indicator in the country. And the inflation-adjusted principal amounts will be used to determine your possible interest earnings. Some important things to note about TIPS include:
It pays less than ordinary government securities: You can expect the interest rate for TIPS to be a few points below that of ordinary bills and bonds. But a TIPS holder stands to benefit in two ways; one is through regular principal amount adjustments in accordance with CPI changes and the second in form of the agreed interest.
Inflation is currently not an issue: TIPs is supposed to caution you against volatile changes in inflation like in the case of 2007/8 economic downturn when the purchasing power decreased by 3.84%.
The Treasury Direct account can be cumbersome: Unlike stocks, you can buy
TIPS directly from the government through a Treasury direct account. But I believe you are better off using a TIPS fund for two reasons. The managers are more experienced and therefore able to tell the best buys and also because it is more effective than using the sluggish Treasury Direct website.
Best for savings not investment: You are better off using TIPs for savings and not for investments because they post lower returns and are essentially designed to protect the principal amount from depreciating at the expense of earning solid incomes.”
Edith Muthoni, Chief Editor, Leanbonds.com
The Current Fed Policy On Interest Rates
“There is no doubt of an accelerating attraction to inflation-protected U.S. government bonds. The key to answering why this is occurring rests with the current Fed policy on interest rates. The facts are that the nominal and inflation-adjusted bond yields have dropped over the past 12 months (i.e., taking the 10-year U.S. government bond yields as an interest rate yardstick.) The economy is still chugging along in full-growth mode, thus exerting pressure on future yields and boosting bond prices still more. At the same time, the Fed’s go-to inflation gauge (measuring inflation over five years starting today) indicates an expected rate of just over 1.8%. We don’t expect the Fed to resume increasing interest rates until we see a small excess over the expectation. The scenario painted above points to inflation-protected bonds outperforming the categories with zero protection (i.e., nominal rate bonds). Even if reality overtakes expectations and the Fed pushes interest rates earlier than expected, inflation-protected bonds like TIPS (Treasury Inflation-Protected Securities) should continue to head the pack. The reasoning is that inflation will be back in play to spur the Fed’s change of direction, and therefore TIPS (indexed to the inflation rate) will continue to thrive. Either way, you are a winner in our view.”
Gordon Polovin, Finance Expert, Serves on the Advisory Board, Wealthy Living Today
These Types Of Investments Are Best Suited For Individuals Who Are In Or Approaching Retirement
“Treasury inflation protected bonds (TIPS) are designed to help investors protect against the effects of rising prices. These types of investments are best suited for individuals who are in or approaching retirement as they are a hedge against inflation and they provide the strongest bond hedge against default risk. TIPS also provide income in the form of coupon payments. These payments are generally paid semiannually and are based as a fixed percentage of the face value of the bond. The fixed-rate is applied to the principal, and like the interest payments, it can rise with inflation and fall with deflation. A couple of important things to note are that once TIPS mature, the investor will receive the greater of their original investment or the adjusted higher principal amount. Meaning the investor can’t lose money during a deflationary period. TIPS are best used in non-taxable accounts (Traditional or Roth IRA, etc.) because the increase in the bond’s value will cause a taxable event each year there is an increase.”
Jordan Sester, Founder/Investment Advisor Rep, J.S Financial Group
You’re Better Off Owning Them In IRAs
“They’re not spectacular. Treasury inflation protected bonds TIPS are government bonds so there’s no default risk. The coupons are small. You run the risk of losing value if you sell prior to maturity. You will lose value in times of deflation. When the face value adjusts each year due to inflation it creates a taxable event. You’re better off owning them in IRAs where you won’t have to report taxes. They do hedge a risk.”
Chane Steiner, CEO, Crediful
Pay investors A Fixed Interest Rate As The Bond’s Par Value Adjusts With The Inflation Rate
“Treasury Inflation-Protected Securities (TIPS) are a form of U.S. Treasury bond designed to help investors hedge against inflation. These types of bonds are indexed to inflation, they have full faith and credit backing of the U.S. government. They pay investors a fixed interest rate as the bond’s par value adjusts with the inflation rate. TIPS pay interest at a rate that is fixed when the bond is purchased. Because the rate is applied to the adjusted principal, however, interest payments can vary in amount from one period to the next. The actual coupon payment (the amount of interest you receive), then, will fluctuate every six months, because it is calculated based on the new inflation-adjusted full value of the bond for the following year. One has to consider whether the variable income is a factor that fits their lifestyle, goals, and needs before purchasing.”
Jimmy Masters, AIF(r) CRPS(r), Vice President-Investments, The Alcaraz Fisher Justis Wealth Management Group of Wells Fargo Advisors
Inflation protected bonds protect investors from the negative effects of rising prices. As with any investment vehicle, there are advantages and disadvantages to investing in Treasury inflation protected securities. If you are interested in TIPS, factor in what these industry experts have discussed, and remember to do your due diligence.