Why Is The Inflation Rate Rising, And What Does It Mean For Us?

Why Is The Inflation Rate Rising, And What Does It Mean For Us?

Inflation is a term that most of us in the US haven't thought a lot about in recent years. For the past decade inflation has averaged a very tame 3%. But there are signs on the horizon that those bucolic days may be over. And one of the first places you may see it is in your closet. The price of cotton (and other commodities) is rising. This means retailers from Wal-Mart and Target to Max Mara and Tory Burch will likely have to raise prices on your favorite duds.

Wait, Didn't We Just Hit A Low On Inflation?

Ironically, these signs are coming on the heels of the core CPI (consumer price index) having risen a mere 0.6% last month, the lowest rate since the index was started back in 1957. How is this possible? The clue is in the word "core." There are a number of different ways to measure inflation. "Core" CPI strips out food and energy prices—under the argument that they are more volatile and can skew the underlying true rate of inflation.

Inflation Is Coming, Inflation Is Coming!

Alas, woman cannot survive on non-core items alone. Food and energy are essential everyday expenses. These areas (often broadly referred to as "commodities") are ones where there are predictions of rising inflation. Prices on cotton, meat, sugar, and coffee are rising. That means everything from the price of your clothes to the prices of your morning java may be rising. Part of this is due to sheer supply and demand. While our economy is barely trudging along in the US, we are but 310 million of the world's 6.8 billion people. Many other economies (think India, China, Brazil) are growing at a healthy clip and we're all competing for these same resources.

Why Inflation Matters

Inflation can be thought of as little financial termites eating away at the foundation of your financial house. If you have $1,000 today and inflation average 3% over the next 30 years, your $1,000 will only be able to buy in the future what $400 does today. And that's at 3%. Up the expected inflation rate to 5% and you'll only have $200 in purchasing power in 30 years.

Two key action steps that you can take today: Take a close look at your budget to see if you can find any extra savings, knowing that your day to day expenses may rise in 2011, and make sure your hard earned long-run savings grows enough to offset inflation through using a low cost mix of stock and bond index funds.

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