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Let’s Celebrate Inflation

Last week, the U.S. Bureau of Labor Statistics reported that the Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3% in September; the 12-month increase equals 3.9%. The agency cited increases in energy and food prices as the main cause for the increase.  

As we’ve been wavering between threats of double-dip recession and higher inflation, this news may be the more positive direction for the economy. For the record, inflation usually exists even in a healthy economy. In fact, The Federal Reserve considers an annual inflation rate of around 2% as optimal. For a point of perspective, inflation averaged 2.8% during the growth years of the 1990s.1  

(CLICK HERE to read the full Bureau of Labor Statistics announcement, October 19, 2011) 

So, amidst all the current economic news, both good and bad, perhaps there are a few nuggets that are specifically relevant and actionable for consumers. As for inflation, prices typically rise because there is a sudden shortage of supply or because demand goes up. Given today’s current stagnant economy, increased demand is good news. This generally means consumers are spending more money; therefore companies can increase prices and, as revenues go up, payrolls increase and so does company growth and expansion – yielding more new jobs.

In related news that further demonstrates the positive side of higher inflation, the Social Security Administration recently announced a 3.6% cost of living (COLA) increase in Social Security benefits for 2012, following a two-year hiatus. Unfortunately for folks not retired yet, the agency also increased the limit on the amount of earned income that will be subject to Social Security taxes – from the current $106,800 to $110,100 starting in 2012.

The IRS also published new, increased contribution limits for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan. Plan limits are increasing from $16,500 to $17,000, starting next year.

(CLICK HERE to read the full Social Security announcement, October 19, 2011)
(CLICK HERE to read the full IRS announcement, October 20, 2011)

If these inflation adjustments are a sign of the times, it may be a good idea to consider options now for inflation-proofing your portfolio in the future. Common hedge strategies include commodities, REITs, currency strategies and inflation-linked securities such as TIPS (Treasury Inflation-Protected Securities). Also, investing in targeted asset classes such as commodities or TIPS through ETFs can be advantageous because they are low cost, transparent, and allow you to get in and out quickly.

If you’d like to discuss ways to protect your portfolio from the impact of rising inflation, please contact us today!

1 U.S. Inflation Calculator. http://www.usinflationcalculator.com/inflation/historical-inflation-rates. Accessed October 26, 2011.

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