Inflation and You

Inflation is known as the periodic increase of price of goods. Various factors could be identified as the reason for inflation. It could be the recent government decisions that have economic impact or outside factors that have direct impact on goods.

When inflation occurs, prices of things and services could increase. People would than have a hard time coping up since their salaries and source of income are unable to adjust to the increase in prices.

As a result, the purchasing power of an individual lessens and it will continue to go down if certain problems on inflation are not addressed such as increase and/or adjustment in salary or federal assistance that could curb inflation.

The inflation rate is generally an annual report. However, the US government through their Bureau of Labor Statistics releases monthly report to alert the government as well as regular consumers. This report affects everyone – especially the traders and investors. It is a general indication on the country’s economic performance which also reflects the performance of each company here in the country. Inflation will not only affect the consumers but also the company’s stock prices.

Inflation Happens

Every investor should know that inflation will always happen. All the government and major corporations could do is to lessen the inflation rate. The government is very wary of inflation since it will suggest that they are unable to control the economy.

On the other hand, companies are also worried about inflation since it will diminish the value of their fixed priced asset. As inflation will diminish the purchasing power of the consumers, they will also shy away from non-essential products and services which mean inflation will greatly impact most companies as well.

As an investor, you need to realize inflation happens and it could affect your portfolio. It will not trigger any immediate effect but it will cause some problems in your portfolio in the long run if you do not  consider inflation. Everyone is affected by inflation and it is not just your purchasing power that will be affected but your portfolio as well.

CPI vs PPI

There are two types of inflation measurements: the Consumer Price Index or CPI and the Producer Price Index or PPI. Both CPI and PPI have to be considered by the investor but with a varying degree. This ultimately depends on your portfolio and the company you are investing with.

For example, if you are investing in a retailer, then you could profit from the increase in CPI without the increase in PPI. On the other hand, if the PPI increases without the CPI, your portfolio might never improve or even go down further. Any movement in CPI and PPI should be considered as it will have lasting effect in your portfolio.

On the other hand, any movement in PPI and CPI will have a direct impact on your portfolio based on the company’s assets. Some of the company’s assets are able to move along with inflation which means its price will also improve. However, there are companies who bank on fixed priced assets. If your portfolio is based on companies with fixed priced assets, you could be in trouble if there is inflation.

But do not panic yet if you are investing in companies with fixed price assets. You should only be concerned when inflation will dramatically increase. If inflation is in small percentage, the company’s additional output will make up for the fixed price assets.

Always aim for a company that could improve with inflation. It will give you the assurance of improvement whatever the inflation rate is. Although it could not be guaranteed, it is a better option compared to companies with a lot of fixed price assets.