Understanding inflation headlines


Inflation is nothing new, but has been the focus of recent financial headlines. Historically the price we pay for things increases over time. In 1970 the price of a candy bar was 10 cents, in 1980 an average model car would cost you $7,000. So what causes the price of goods and services to creep up over time? There are a number of factors that contribute to inflation. First, is an increase in production costs. Production costs could include the price of raw materials, increase in wages, or trade variables (import prices for example). The second factor is a spike in demand. If you remember your Econ 101 class, if supply doesn’t change and demand increases prices go up.

What does this mean for monetary policy? The US Federal Reserve (“The Fed”) was put in place to help control two factors impacting our economy, one of them being inflation. The Fed does not want the economy to “overheat” so they set a healthy benchmark for inflation. If, by various metrics, we go over the benchmark for inflation the Fed makes use of policy tools like adjusting interest rates and controlling money supply.

How does that impact me and my financial plan? Inflation can be an anchor on your portfolio. If your portfolio is earning less than inflation then you are losing money over time without even realizing it. Talk to Hamilton Walker Advisers about ways to make sure your portfolio is keeping up with inflation and ensuring you meet your long term financial goals.