Inflation is when prices of goods and services rise causing you to lose purchasing power. So let’s say you have $1 today and it buys 5 sticks of gum. Next year, it may only buy you 4 sticks of gum. The same amount of money bought less stuff over time. That is what we call inflation.
Inflation and Investments
Here is the quick story of why it matters in investing and how even the best investments can be derailed by inflation. Let’s say you are extremely risk averse and you don’t want to invest any of your savings in stocks or even bonds. So you stick it in your mattress.
The problem with this is that you will lose a certain amount of purchasing power each year that you keep it in your mattress. Yes, it is safe, in one sense. But in another, your money is being devalued.
Next, let’s say you put it into a savings account that gives you 2% a year. Your money is technically growing, but if inflation is more than 2%, you are still losing money. This is why keeping all of your money is a savings account only is not a great idea over time.
Inflation Rate – Economic Indicators
There are a number of ways to find out what the inflation rate might be. Here are some of the key economic indicators that will hint at where the inflation rate might be headed.
The first one is the Gross Domestic Product, commonly known as the GDP. It is released quarterly by the US Department of Commerce’s Bureau of Economics (BEA). The GDP is the measure of the goods that were produced in a given period of time. Essentially, it tells how much stuff we produced.
The GDP numbers come out in 3 phases. The first phase is the advance data. Then you have the preliminary numbers a month after that. Then you have the final numbers a month after that.
GDP is very closely watched by those doing stock market trading. That is because it indicates the health of the economy and if it is growing, and at what pace it is growing in. Economic growth is strong factor in stock market growth as well. If the GDP grows, you might want start looking out for inflation.
Consumer Price Index (CPI)
The Consumer Price Index is a survey of prices for basic goods and services. The things this survey would include are things like food, housing, energy, clothing and transportation. Each of these categories are weighted depending on a number of different factors. The CPI is released each month by the US Department of Labor’s Bureau of Labor Statistics.