Public Domain. Source: Pxhere
One of the most challenging financial pressures on all of us is inflation. It’s hard enough to balance our household budgets without prices going up all the time. When I was growing up in the ‘70s, our family was roiled by rising prices for groceries, clothing, and just about everything else. It was hard for businesses to plan, too, as managers couldn’t tell if what they could charge for their goods could keep up with the cost of production. Economists now call that time of rising prices, “The Great Inflation.”
But as bad as inflation is, deflation is worse. Falling prices mean that producers may lose money if they grow. There’s little incentive to take any risk, as your money gets more valuable even if it’s literally just stuffed in a mattress. Companies fail as the price they receive for their goods go down. Both significant inflation and deflation are bad for all of us. It’s hard for companies to invest, and economic growth stagnates.
That’s why the Fed is so concerned about inflation, about finding a healthy balance. And on that score, they’ve been remarkably successful for most of the past decade.
Source: Dallas Fed, Department of Commerce
Measuring inflation accurately is difficult, but economists prefer to use a core measure, without the highly volatile elements. If the price of garlic doubles one month, we can switch to using ginger powder in our cooking.
When we look at core prices, they’ve been increasing between 1½ % and 2% per year for the past seven years. And there’s no evidence that inflation is headed significantly higher or lower. When it comes to planning, it doesn’t get much better than this. Overall, most of the prices in the economy are fairly stable. The rising cost of tuition has been balanced by falling prices for transportation and computers.
Inflation may be a lot like ice cream: everyone has their favorite flavor and topping. But no matter how you measure it, inflation looks pretty stable right now. And that’s been good for consumers, good for business, and good for the markets.
Photo: Lotus Head. Source: Wikimedia
Douglas R. Tengdin, CFA
Charter Trust Company
“The Best Trust Company in New England”