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What Every U.S. Investor Should Know About Inflation

Economics / Inflation Feb 03, 2012 - 09:39 AM GMT

By: Tony_Caldaro

Economics

Best Financial Markets Analysis ArticleThe Department of Labor publishes the Consumer Price Index (CPI) every month to monitor the inflation rate in the US. The chart below displays the annual rate of change, month to month, of the CPI in the Greenspan/Bernanke era. As you can observe it has averaged about 2.5%.


The Department of Labor also publishes a ‘core’ CPI, excluding the so called volatile food and energy components of the CPI. This statistic during the same period has also averaged about 2.5%, but has been closer to 2% over the past two decades.

The FED monitors the CPI, and inflation expectations, but they also track the PCE index.

The Personal Consumption Expenditure (PCE) measure is the component statistic for consumption in GDP collected by the BEA. It consists of the actual and imputed expenditures of households and includes data pertaining to durable and non-durable goods and services. It is essentially a measure of goods and services targeted towards individuals and consumed by individuals.

When we review the chart of the PCE in the Greenspan-Bernanke era, the consumption rate has remained between 2 1/2% and 9 1/2% since 1987. Notice every time it has dropped to around 3% was during a recession. The average PCE consumption rate, prior to the 2008 drop, has been around 5% annually.

Now observe what has happened over the past few years. In October 2008 the FED started QE 1 when consumption was plummeting. There was a slight bounce in early 2009, but it then broke lower. QE 1 was then expanded to $1.4 tln. Consumption then picked up, and hit over 4% by 2010. When it started to drop toward 3% in mid 2010, a $600 bln QE 2 program was announced. A higher, and statistically normal, rate of 5% was achieved in 2011. Now look at it drop again. We believe the FED will start a QE 3 program should the consumption rate approach 3% again.

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After about 40 years of investing in the markets one learns that the markets are constantly changing, not only in price, but in what drives the markets. In the 1960s, the Nifty Fifty were the leaders of the stock market. In the 1970s, stock selection using Technical Analysis was important, as the market stayed with a trading range for the entire decade. In the 1980s, the market finally broke out of it doldrums, as the DOW broke through 1100 in 1982, and launched the greatest bull market on record. 

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Copyright © 2012 Tony Caldaro - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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