This week we are going to discuss inflation to further my blog from last week about people hoarding cash. They are saving 33% of their income! There’s an additional $3 TRILLION in bank accounts across the country. Certain goods and services are getting more expensive (bikes) while other goods are getting cheaper (gas). What is inflation? What are the components of inflation?
Inflation is the increase in prices of goods or services that consumers purchase. The Consumer Price Index (CPI) is the most widely tracked index. The CPI is a basket of goods that the Bureau of Labor Statistics (BLS) developed by monitoring individual and family purchases over a two-year period. The index is considered a lagging indicator as it is looking at previous purchase patterns. The BLS then categorizes the purchases into eight major groups: apparel, transportation, education, recreation, medical care, food and beverages, housing, and other goods & services.
According to St. Louis Fed President, James Bollard, the Fed aims to have a 2% inflation for three primary reasons. These reasons are 1) Inflation is difficult to measure, and indexes used to track inflation have an upward bias. 2) Inflation tends to go hand in hand with interest rates. Therefore, if the economy heads into recession, the Fed is able to stimulate the economy by lowering the interest rates. In other words, it gives them a little wiggle room to lower rates when times are tough. 3) Many believe that Inflation can be bad if left unchecked; however, it’s not nearly as bad as deflation. Deflation occurs when the cost of goods and services go lower for a sustainable period of time. In deflationary environments, people postpone purchases as they feel they’ll get a better price by waiting. This isn’t good for economic growth.
ETF of the Week: iShares Emerging Markets (EEM)
The domestic stock indexes had a rough week as all were down. iShares Emerging Market ETF (+.63%) was the best performer this week. This index is market-cap-weighted, and larger companies have greater weighting. The top 5 markets China, Taiwan, South Korea, India, and Brazil make up 71% of the holdings.