Understanding Inflation

Understanding Inflation

Tom Lawson

by Tom “Tex” Lawson

Director of Military Outreach

With the rise in prices, we thought a brief primer on inflation was warranted. The simple definition of inflation is the sustained upward movement in the overall price level of goods and services in an economy. The result of inflation is it takes more money to buy the same amount of goods and services than it did in the past.
It also is a result of how the Federal Reserve controls our money supply. At different times and circumstances inflation can be either good or bad for us. It is dependent on our own situations. If you owe money, inflation can be a good thing. If people owe you money or you are on fixed income then, inflation can be a bad thing.

There are two main types of inflation

  • Demand-pull Inflation: It occurs when demand for goods or services increases but supply remains the same, pulling up prices.
  • Cost-push Inflation: It occurs when supply of goods or services is limited in some way, but demand remains the same, pushing up prices.

Investopedia has a very good discussion of inflation that can be accessed at the link here.

How is Inflation Measured?
The U.S. inflation rate is measured by the Consumer Price Index, the Producer Price Index, and the Personal Consumption Expenditures Price Index. Because no one index captures the full range of price changes in the U.S. economy, economists must consider these multiple indexes to get a comprehensive picture of the rate of inflation.

The simple formula to calculate the inflation rate is as follows:

(Current Price – Former Price)/Former Price

How do you Beat Inflation?

Having a long term strategy by investing in a balanced portfolio.  Stocks have returned approximately 6% above and beyond inflation since 1930.  Consider TIPS (Treasury Inflation Protected Securities) and look at fixed annuities.   Also consider investing in mutual funds, stocks, and ETFs, and then living off the returns and dividends.  Contact us at Client First Capital and let you help you navigate these unusual times.