What is inflation?
Inflation is the rate at which the cost of goods and services rises over time. When inflation is high, we experience a loss in buying power because each $1 buys less than it used to.
Inflation is reported by the Bureau of Labor Statistics which tracks two main data points:
- Consumer Price Index (CPI) which is inflation experienced by consumers.
- Producer Price Index (PPI) which is inflation experienced by producers.
The main difference between CPI and PPI is that the CPI tracks the prices of goods and services while the PPI tracks the prices of raw materials that are used to make goods.
There are two primary types of inflation that investors should be aware of — demand pull inflation and cost push inflation.
Demand pull inflation
Demand pull inflation occurs when the demand for goods and services is greater than what is available. When this happens and the supply of those goods and services remains the same, the greater demand can pull the prices of those goods and services much higher.
Cost push inflation
Cost push inflation occurs when the price of goods and services increases due to the rising cost of production, which may also limit the amount of goods that can be made. Under this type of inflation, when demand is unchanged but supply costs rise, the price moves higher because producers have to pass along their higher production costs to consumers. If they don’t, they wouldn’t be able to cover their cost of production.
Is all inflation bad?
Of course, many new investors might think that all inflation is bad. However, some low levels of inflation are typically viewed as healthy for the economy. In fact, that is why the Federal Reserve (the bank that sets policy to encourage employment and manages short-term interest rates for the United States) works to target an inflation rate of around 2%. At this level of inflation consumers are incentivized to spend and employers are incentivized to hire more workers. If however, inflation runs significantly higher than this 2% average target, it can cause spending to stop and create economic contractions.
United States Inflation Rate 1960-2020
The last time we faced an inflationary environment in the United States marked by inflation rates of nearly 6% was in the early 1990’s. The best performing investments during an inflationary environment might include a mix of any of the following:
- Real Estate
- Precious Metals like Silver and Gold
- Treasury Inflation Protected Securities (TIPS)
Luckily for investors, it is possible to buy these investments in public stock markets. However, it is always important to be diligent about which investments to select because each has their own benefits and drawbacks.
At Metas Investments, we manage portfolios to provide our clients with exposure that we believe will do well despite the economic environment ahead. If this is something you would like help with, get in touch with us.
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Metas Investments LLC (“Metas”) is an investment adviser registered with the State of Texas and our fees and services are more particularly described in Form ADV Part 2A.
This presentation provides general information about the business practices and professionals of Metas. The information is not intended, and should not be construed, as legal, tax or investment advice. The information provided has not been approved or verified by any state or federal securities authority. Additional information about Metas is available on the Securities and Exchange Commission website at www.adviserinfo.sec.gov.
This presentation is for informational purposes only and does not constitute an offer to provide advisory or other services by Metas in any jurisdiction in which such offer would be unlawful under the securities laws of such jurisdiction. The information contained on this presentation should not be construed as financial or investment advice on any subject matter and statements contained herein are the opinions of Metas and are not to be construed as guarantees, warranties or predictions of future events, portfolio allocations, portfolio results, investment returns, or other outcomes. Viewers of this presentation should not assume that all recommendations will be profitable or that future investment and/or portfolio performance will be profitable or favorable. Metas expressly disclaims all liability in respect to actions taken based on any or all of the information on this presentation. Past performance does not guarantee future results. All investing involves risk. Investment return and principal value will fluctuate with changes in market conditions. Current performance of positions may be higher or lower than presented in this report. Nothing in this report should be construed as an offer, recommendation, or solicitation to buy or sell any security. Additionally, Metas Investments does not provide tax advice and investors are
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