According to the Labor Department, inflation is currently running at 1% (a four year low) and dropping. For consumers, low inflation seems pretty cool. Low inflation means we can buy more “chozzerai” (junk) for the same amount of money. What’s wrong with that?
According to the Federal government, plenty. When people expect prices to stay low, they don’t spend. But when prices are going up, consumers have an incentive to buy a bunch of crap they probably don’t need anyway before the price increases. When people spend more, business has to produce more and they hire people to make it. That leads to more jobs. This is the core reason why the government wants to see inflation perk up. Unemployment is still running at 7% and that’s too high.
In a way, a little inflation helps some consumers – but it mostly helps investors. Inflation lifts real estate prices and reduces the relative weight of debt. It also can help support higher stock prices.
According to the Investor’s Business Daily, some policy makers would like to see inflation as high as 5%. But quite frankly, they would be satisfied with any acceleration in inflation. That’s because they are deathly afraid of the alternative – deflation.
What Is Deflation And Why Is It Ugly?
Deflation is the exact opposite of inflation. It is a situation in which prices get progressively lower over time. This is a death spiral for the economy because when people expect lower prices in the future, they really stop shopping. And when that happens even more people lose their jobs. That leads to less spending leading to lower prices which leads to less jobs, spending and so on and so on. Believe me, it’s ugly.
This happened in Japan 30 years ago and they are still trying to get out of that quicksand. The last thing anyone wants is to see the same thing happen in the USA .
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What Is An Investor To Do Now?
It’s clear that the policy makers are finding it difficult to really get the economy revved up to the levels they want to see. As a result, some people expect government stimulus to continue for a while. If the stimulus does persist, that may or may not result in higher inflation.
As I’ve written before, corporations are getting stronger and healthier as are consumers. The problem is that nobody is spending a lot of cash. Many people lack confidence so they are sitting on that cash rather than deploying it. That leads to slow growth.
This is a situation that could persist for a while. If so, it could be good for investors but bad for people who are out of work.
On the other hand, inflation could continue to decelerate and we could indeed slip into deflation. That hasn’t happened yet but it’s possible.
And then there is the other side of the coin. The government’s plan could work and inflation could heat up. Initially, that might help but if it gets out of hand, it could hurt lots of people – investors included.
Again, I have no idea what is going to happen but I do know one thing. More money has been lost anticipating a bad future than going through one. I am not suggesting that you ignore current events, deflation or inflation. I am simply recommending that you stick to your investment strategy – or find a strategy that suits you and stick to it.
Are you concerned about inflation now? Are you investing differently as a result?