At the end of May, the Commerce Department reported that the price index for personal consumption expenditures increased by 1.6 percent in April from a year earlier — the fastest pace since November 2012. This is the latest sign that U.S. inflation is starting an upward trend.
Banking on expectations for a targeted 2 percent inflation rate, the Federal Reserve Bank is scheduled to phase out its bond purchase program this fall. New Federal Reserve Bank Chairwoman Janet Yellen has indicated that the Federal Open Market Committee plans to keep short-term interest rates at near-zero level for a “considerable” time after the quantitative easing program ends. The plan is to increase rates very gradually thereafter.
[CLICK HERE to read the article, “Inflation Creeps Higher but Undershoots Fed Target for Two Years,” at The Wall Street Journal, May 30, 2014.]
[CLICK HERE to read the article, “Fed’s George wants rate hikes soon, and not too gradual,” at CNBC, May 30, 2014.]
When it comes to inflation, however, the consumer price index is not the only indicator to monitor closely. Wages — including the current debate over whether (and by how much) to increase the minimum wage — also tend to be a powerful influence. That’s because once increased, wages tend to stay at a certain level — they do not fluctuate up and down like inflation rates and stock prices. Consequently, wage hikes can have an enormous impact on consumer confidence and spending. Greater spending, in turn, can influence prices — which affects inflation.
However, high unemployment tends to put a downward pressure on inflation, as spending rates remain conservative. With fewer jobs available, employers can offer lower wages. Add in competitive labor markets across the globe, and there is further downward pressure on both wage and employment rates. So you can see how both unemployment and wage levels impact inflation — which then impacts the direction of interest rates.
[CLICK HERE to read the report, “Janet Yellen on Inflation,” at Western Asset Management, April 2014.]
[CLICK HERE to read the article, “Why Inflation Is So Low,” at NPR, May 15, 2014.]
Despite the leading economic indicators that are tenaciously tracked and analyzed by nearly every economist, money manager and think tank out there, inflation continues be relatively unpredictable — and in some cases uncontrollable.
[CLICK HERE to read the article, “Weird Money Facts: 5 True Cases of Unbelievable Inflation,” at WiseBread.com, retrieved May 15, 2014.]
But like most things in life, how well we weather the unknown comes down to how well we prepare for it. Inflation can impact each of us differently because we all have different priorities — such as the value of education, health and nutrition, lifestyle luxuries and ideas for retirement.
[CLICK HERE to read the article, “How to Protect Clients’ Portfolios against Inflation,” at Financial Planning, May 28, 2014.]
It’s our job to help protect our clients’ retirement income from the effects of inflation. Please contact us if you would like to inflation-check your current financial situation.
Our firm assists retirees and pre-retirees in the creation of retirement strategies that include the use of insurance products.
These articles are being provided for informational purposes only and should not be used as the basis for any financial decisions. While we believe this information to be correct, we do not guarantee the accuracy or completeness of the information included. All clients are encouraged to consult qualified tax and legal professionals before making any decisions about your personal situation.
If you are unable to access any of the news articles and sources through the links provided in this text please contact us to request a copy of the desired reference.
Source: Woods Blog Old