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Current Rate of Inflation in United States
Current Rate of Inflation in United States:
Investors Tell the Fed to Take a Hike
A Special Report for Dynamic Market Alert
July 16 , 2006
by Todd Schoenberger
Editor, Diligent Investor and American Capitalist
"Inflation is here and it's not going away anytime soon," or so says the FOMC, as it gets ready to hike the Fed Funds target rate once again. Realistically investors can expect further increases to bring the target rate to 5.50%.
Data Is Stronger Than Expected When It Comes to the Current Rate of Inflation in the U.S.
All one needs to do is look at the data. Recently the University of Michigan reading on consumer sentiment was reported higher than expected. Evidently, consumers continue to smile even though they're being slammed by $3+ for a gallon of gas.
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And then, the Department of Commerce released a surprisingly positive U.S. housing starts report: May housing starts increased by 5%, while the consensus expectation was for a 1% gain. Interestingly enough, the April figure even had an upward revision. Demand is softening, however, as housing starts are still 14% below the January peak and the second quarter average is about 10% below the first quarter average. Any way you want to look at it, the housing market is simply cooling, which is a long way from collapsing.
Inflation and the U.S. Economy: The Economy Is Warmer Than Room Temperature
The economy is still growing at a rate that some would argue is warm, not hot, but it certainly isn't room temperature. The Fed's prior 16 rate increases have slowed down the economy, but it's not doing too much to shut down the housing market.
And, why should it? The media likes to sell us with stories about a housing collapse, and it always makes interesting reading after the Fed hikes interest rates because higher mortgage rates typically follow, thus slowing down the housing sector.
But, guess what: homebuyers don't care. Even if mortgage rates hit 7% this summer, as some mortgage bankers are predicting, they are still lower than the double-digit rates we witnessed in the late '80s and early '90s. So, buyers are forced to buy a smaller house and sellers will settle for a slightly lower price. It doesn't matter because as the data explains, a 7% mortgage isn't going to stop people from buying what they want.Inflation in the United States: Inflation Is a Cancer
If I was Chairman Bernanke, I would instruct all of the central bankers to worry about one thing and one thing only: Inflation. It needs to be stopped. Higher rates won't kill the spirit of the American consumer, but inflation will. It paralyzes growth and discourages saving. It acts like a cancer -- if it's not controlled and stopped, it will kill the economy.
President Ronald Reagan once had a fitting quote: "Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man."
Reagan would know about the problems of high inflation because when he entered office, the United States was staring at double-digit inflation and an economy stuck in quicksand. Will that happen again? Who knows? But the May inflation reading of 4.17% is only the second-highest rate Americans have seen in the past 15 years. Inflation has to be the biggest concern for the Fed right now.
Making Money From Inflation: Steps for Investors to Beat Inflation
Today, investors have many challenges when it comes to maintaining a well-diversified portfolio. In addition to extreme market volatility and saving for retirement or tuition, investors have another concern to worry about: Inflation.
Inflation affects everyone. It doesn't matter which social class you are in or how much money you have in the bank - inflation can decimate your financial security because it erodes purchasing power and reduces what your money can buy.
So, what's an investor to do? Well, the good news is there are opportunities available for you to guard your portfolio against inflation and we have listed three of them for your consideration:
1. TIPS
TIPS are excellent investments to help combat inflation. Your purchase is directly tied to the Consumer Price Index (CPI) - therefore the principal investment in a TIPS increases with inflation, or will decrease with deflation.
The periodic adjustment in the principal is an excellent way to earn higher interest payments as prices rise, thus, maintaining your purchasing power.
For example, a person invests $100,000 in TIPS yielding 2%. If the CPI rises 3% over the next year, the investor would still earn 2% on the investment, but now the interest would be based on a principal value of $103,000. Also, TIPS pay interest twice a year.
2. Stocks
Buying and holding onto stocks is another way to cure the inflation bug because returns on stocks have generally outpaced inflation rates. For example, the S&P 500 has gained 10.4% annually from 1926 through 2004, easily beating the average 3% inflation rate during that time. Stocks of smaller companies have performed even better, returning 12.7% annually during that same time period.
To compare, bonds have had a tougher time winning the race against inflation. In fact, intermediate-term government bonds have delivered an annualized rate of just 5.4% over the long run.
Whether you are young or old, novice or professional, everyone should have some part of their portfolio in equities to help them defeat inflation.
3. Gold
Commodities like gold typically perform well during periods of inflation while often providing equity-like returns over time. This bullish action is because the money backed by gold cannot be created arbitrarily by government action.
By removing this uncertainty in currency, gold tends to appreciate during periods of inflation and makes a terrific compliment to your inflation-fighting portfolio.
The Fed has its hands full with the inflation battle, but I hope these few suggestions will help curb any concerns you may have for your portfolio.
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Copyright 2006, The Taipan Group, LLC and Dynamic Market Alert, 808 St. Paul St., Baltimore, MD 21201
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Information contained herein is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed.