February 4, 2019

Analyzing inflation

“Back in my day for 10 cents I could spend the afternoon at the movie theater and get popcorn, a candy bar, and a coke.” – Grandpa.

Why does that same movie theater experience today cost $30? The price of goods and services has gone up over the years and we can blame that on inflation. Inflation is defined as the price of a basket of goods and services and the price for that same basket of goods and services at a future date, if the price for those goods and services increases, inflation, if the price decreases, deflation. We can measure inflation in many ways, but the most commonly used tool is the Consumer Price Index (CPI) or the Gross Domestic Product Deflator (GDP Deflator). The Bureau of Labor Statistics publishes a monthly report that shows changes in CPI by sector or product category.

So what causes inflation? Inflation is caused by two main economic changes, either Demand-Pull or Cost-Push. Demand-Pull is when the demand for a product or service is greater than the economy’s ability to produce that product or service and the increased demand and scarcity of the product or service results in increased pricing.

The second economic change is Cost-Push, this is when the cost of producing a good or service increases. This can be from a rising cost of steel or other raw materials, rising costs of labor, rising costs of shipping etc. These increased costs drive the price of the good or service higher for the end consumer.

How do we fight or hedge inflation risks? We must understand that inflation risks are a real thing and something to take seriously. The only way to win the fight against inflation is for our dollars to earn more money than the cost of inflation on the goods and services that we will buy. For our dollars to earn money, we must invest them. There are several different ways to invest your hard-earned dollars to fight inflation: personal development of skills, investing in your business, investing in the stock or bond market, etc. There is no one size fits all advice for investing, but we are happy to help you think and execute your investment needs. Just know that when you leave your cash in the bank, under your bed or buried in the backyard, it is losing value or buying power, due to inflation.

If you have any questions about inflation, or how you can make your hard-earned dollars work to fight inflation, please let me know, I can be reached at 913-681-9155 or taylor@engageadvisors.com.

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