The markets dropped early last week with the news that core inflation was at 3% before beginning to rebound on Thursday. Why such a swing based on one economic indicator?
First, what is inflation? It’s the rate of increase in the prices we pay for things. The Federal Reserve Bank, commonly called “the Fed”, uses the core personal consumption index, or core-PCI, to measure inflation.
It’s important to remember that our central bank, the Federal Reserve Bank, is unique among central banks in that it has a dual mandate of price stability and full employment. Other countries are only concerned about the inflation piece, whereas the Fed aims to keep inflation around 2%, and unemployment around 3.5 – 4%.
Last year, after a significant study period, the Fed changed its policy concerning inflation. It used to be that 2% was considered a ceiling and, when the ceiling was reached, the Fed would reduce the monetary supply by raising interest rates. The policy change was that the 2% should be a long-term average and not a ceiling, and that temporary spikes over 2% would be tolerated, especially is we were not at full employment.
Last week, inflation data was released, and it was well over that ceiling. The Fed feels that this inflation is temporary – fueled by the massive government stimulus and spending, and the reopening of the economy. Temporary spikes in demand have led to price increases. Unemployment remains high, although the number of unfilled jobs is higher than normal and growing.
What does this mean for you? We’ve all seen prices increases on home improvement items and other goods that are in high demand. For now, the Fed intends to keep interest rates low as the labor market heals. Having a financial plan in place and sticking with a set of investments that were chosen to help you meet that plan is a good start. If you are worried about low interest rates affecting your returns, talk with your advisor about your current mix of stocks and bonds, and how much risk you need, and are willing, to take.
Your action to take this week is to floss your teeth. If that doesn’t sound like financial advice, you haven’t seen the dental bills facing retirees, often when they no longer have dental insurance. Taking care of your pearly whites now can save you significantly down the road. And you can always find financial information and resources on our website at covingtonalsina.com and on our Facebook page.
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