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In order to achieve our financial goals, we need to remain aware of the business cycle. Many trends will start and end, but will be difficult to track and be prepared for. Trends could also be localized to a different region, skill or trade. The business cycle is cyclic and research of past events can help us make better decisions and observations in the future. Awareness of business and economic cycles will build the foundation in our financial plans. Inflation is one of the economic phenomena we can begin to be aware of in regards to it’s impact on us.
Inflation and deflation are the two results from an important relationship. The relationship between goods and services in the economy to it’s counterpart, the amount of money in circulation; will normally determine whether our economy experiences inflation or deflation. Inflation and deflation have an impact on the prices you pay for most goods and services. This impact has it’s own name and is researched and published monthly by those who help keep track of it; the Bureau of Labor Statistics publishes annual and monthly updates to the Consumer Price Index.
The consumer price index (CPI) refers to the changes in prices of consumer goods, that would generally be purchased by urban households. The Bureau of Labor Statistics measures CPI on a monthly basis, and issues an annual update of the change over a 12 month period. Between July 2018 and July 2019 the change was reported as 1.8% over all items. The item categories include: food, new and used cars and trucks, shelter, apparel, energy, education, communication, transportation, services, and medical care.
The categories are pretty in-depth. Food at home includes lettuce, baby food, potatoes, apples, milk, pork, cookies, bananas and a total of 26 different items for just the Food at home category. For example, out of the 26 items in the food at home category; eggs, oranges, dried beans, peas, lentils, chicken, snacks, tomatoes, and bananas all decreased. All item categories have seen an increase besides Energy expenses. Increases were seen across food, used cars and trucks, new vehicles, shelter, transportation services, and medical care services.
The CPI is a good measure which is thought to be reflective of consumer spending habits, business’ supply focuses, import and export policies; but really, the CPI is reflective of all these acting together. I chose some costs because of the large communities it impacts. Those who like to visit restaurants, bars and having fun on the weekends; alcoholic beverages increased. Families with new born babies may see the impact on the increased of price in baby food and supplies. We can also expect rising prices for rent, medical care and food outside of home.
Consumer Price Index tracts prices of the certain categories and commodities; Inflation helps us understand the business cycle and anticipate future economic policy. Understanding inflation and CPI can help us put ourselves in a better financial position down the road, with better decisions aimed towards the future. For example, as CPI explains that over time our current dollar can buy so much less, we could use it to find investments that are keeping ahead of inflation. Observe the examination of some other annual changes, such as the increases in the House Price Index, Nasdaq Composite Volume, annual change and my investopedia.com stock simulator annual increase, and FDIC savings/interest checking rates limitations.
Looking at the comparisons of Consumer Price Index versus other increases, we can draw some conclusions. First, we can check our savings accounts rates and compare it to the CPI. The increase in the rate almost incentivizes having some amount of income in investments rather in savings accounts. More so, the housing prices index shows real estate prices are increasing more than inflation. Lastly, with stocks; you could get ahead of CPI depending on if you choose stocks and hold them long enough provided they provide your expected rate of return. The Nasdaq composite seems to have kept up, but remember it involves many different stocks and their performance. The thing with the indexes is they will be slow and very general. They help in broad research and finding a direction or necessity for more information.
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