Inflation: What You Should Know in 2019Submitted by Fiduciary First Advisors on February 25th, 2020
Inflation: a sustained increase in the general level of prices for goods and services measured by the U.S. Bureau of Labor Statistics. As inflation rises, financial markets react, purchasing power decreases, and companies adjust pricing.
The U.S. Federal Reserve aims for a 2% inflation increase; a moderate price growth is a sign of a healthy, growing economy. However, concerns have emerged that the economy is weakening and inflation could drop below its target. This would mean the Fed would cut interest rates to give the economy a boost, which may increase inflation as well. The issue? Too much inflation can be harmful, as the consumer most likely already knows.
The most commonly used measure of inflation in the U.S. is based on the consumer price index. That is, the consumer index is the average price of a basket of goods and services that households typically purchase. This number is often used to regulate pay raises or retiree benefit adjustments. The year-to-year change is the inflation rate.
The cause of inflation boils down to two reasons: demand-pull inflation and cost-push inflation. The latter is a far less common clause relating to restricted supply but unrestricted demand. During Hurricane Katrina, consumer demands for gasoline didn’t change, but damaged gas supply lines nearly doubled prices. Demand-pull inflation happens when consumer demand exceeds supply. When there are limited amounts of a product, prices increase.
Naturally, the fear of inflation’s impact can leave consumers looking for a way to protect themselves. The best way is to secure an increase in ability and income. The more you make, the less inflation impacts you. However, those on a fixed income also have a few options:
Invest: The stock market has returned 10% of investments over time. However, the risk is whether it will do so in the future. Careful consideration should be adhered to make sure it fits in-line with other financial goals.
Treasury Inflated Protected Securities (TIPS): this bond is a purchasable instrument from the U.S. Treasury. As inflation increases, the value of the bond also increases, although interest rates do not. During inflation, TIPS works well. If inflation goes down, they do worse. TIPS may not work in every situation as they are required to be bought in large value that is often outside of the income of many individuals.
Series I Bonds: this instrument offers a guaranteed fixed rate of return for the life of the bond. Affected by a variable rate that is reset twice a year, the return of the bond is a composite of its fixed-rate and variable rate in effect at that time. The Treasury Department’s Savings Bond Calculator can help determine each bond’s return.