Welcome to the Weekly SUMmary - 07/09/2021
Inflation!
What is inflation?
“In economics, inflation (or less frequently, price inflation) is a general rise in the price level of an economy over a period of time.[1][2][3][4]”1
This is pretty easy to understand. Inflation is price increases over time. We could get much more detailed and look at money supply and other economic factors, but let’s focus on the basics today.
Right now, some of the population think the sky is falling. Gas prices, hard goods, groceries, and more have all increased in price significantly over the last few months. Will this continue? Is this 70’s era inflation? Unfortunately, like the rest of the world, I don’t have a crystal ball that can answer this. What I will say is, similar to “death and taxes,” inflation is all but guaranteed.
An example: If minimum wage increases from $10 to $15, in a vacuum, a business owner’s overhead has just increased 50%. Unless this wage increase was subsidized in some way, what option does the business owner have? 1. Become more efficient (this is assuming they are not already running efficiently). 2. Raise prices for the end product. 3. Increase sales (which could lead to more labor costs).
This is Economics 101.
Let’s look at how we typically track inflation. The government releases information on the Consumer Price Index (CPI) frequently.
“The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas. Average price data for select utility, automotive fuel, and food items are also available.”2
See the chart below relating to CPI figures since the mid 1900s.3
What I find particularly interesting is that until the dot com bubble the CPI was not typically dramatically affected by market fluctuations. For the most part, this line is smooth until the mid-2000s. Based on what the CPI measures, it could be argued that if prices were not adjusted dramatically and quickly in relation to market fluctuation, inflation may be more predictable.
The point of this post is this: We cannot control pricing or inflation as individuals any more than we can control stock valuations. There are just too many variables and people involved in the decision making process. What an individualcan do to prepare for this uncertainty is ensure that they are in the best possible situation at any given time. This comes down to basic Financial Planning. Make more than you spend, have savings and invest what you can for long term growth. Ultimately, CONTROL WHAT YOU CAN CONTROL.
To discuss more about how to get in control of your financial future, book a consultation/checkup at the bottom right of this blog page.
Do SUMthing smart with your money.
References:
1https://en.wikipedia.org/wiki/Inflation
3https://fred.stlouisfed.org/series/CPIAUCSL
The content provided is meant to be educational in nature only and not to be construed as investment advice. Investments referenced are for example only and should be considered strongly prior to selecting for your portfolio. Investors should research or seek professional advice prior to buying and selling securities.
