Inflation can take a tollWhen inflation is in check, it becomes more likely that the standard of living for individuals and families will improve. Interest rates tend to track with inflation trends, so lower cost-of-living increases usually keep interest rates down. That makes borrowing cheaper for purchases such as homes and automobiles. By contrast, when the pace of change in the cost of living picks up, it makes most things more costly for consumers, potentially slowing economic activity.
Understanding the inflation rateThe most cited measure of inflation, the Consumer Price Index, weighs changes in prices for a basket of consumer goods and services. It helps give individuals and policymakers an idea of cost-of-living trends over time. The most important number focuses on “core” inflation, a measure of goods and services that eliminates cost changes for food and energy-related commodities. It is felt that components such as food and energy are subject to wild fluctuations that can be caused by geopolitical developments or weather events. Because of their volatility, they are considered a less reliable barometer of broader economic trends.
Why the concern todayThere is growing optimism that as the rollout of COVID-19 vaccines continues, the economy will gain steam. At the same time, the economy is still getting a lot of support. The federal government has provided six trillion dollars of stimulus in the past year. This has come in the form of direct payments to individuals, enhanced unemployment benefits, special support programs for businesses, and aid to local and state governments. Likewise, the Federal Reserve has kept interest rates at historic lows and purchased billions of dollars’ worth of bonds to help add liquidity to the markets. Will the confluence of a steady return to normalcy along with dramatic fiscal and monetary stimuli light enough of a fire in the economy to make inflation a bigger concern? Only time will tell, but it is an issue that bears close watching. Be careful not to overreact to short-term upswings in inflation, but it is always good to have a long-term plan in mind to respond to a changing environment. Consult with your financial advisor to discuss how your portfolio is positioned for the future. Ellie Stubbs is a Financial Advisor with Ameriprise Financial Services, LLC, in Barre. She specializes in fee-based financial planning and asset management strategies and has been in practice for 18 years. Contact her at ameripriseadvisors.com/ellie.stubbs, (802) 622-8060, 14 North Main Street, Suite 2001, Barre, VT 05641. This article is distributed by Ameriprise Financial Services, LLC., a registered investment adviser. © 2021 Ameriprise.
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