Why The Consumer Price Index Goes Up | Effects Of Consumer Price Index To Inflation


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Inflation has become a very disturbing trend these days.

Believe it or not, we don’t like scaring you. The reason we constantly talk about real inflation and how the government manipulated the computation to reflect a much lower inflation rate is to give you a chance to prepare for it.

Your portfolio should be in a position where you are as confident as possible your yield will beat inflation.

That’s our goal. We are not saying it is easy, we are not saying we know everything. What we are presenting are information you can use to plan your portfolio. You still need to talk to a financial adviser and do more research.

In that research, make sure to understand two important concepts: The Consumer Price Index or CPI and Producer Price Index or PPI.

The CPI mesure the price of a basket of good between to time points. This is the primary stat used to determine our inflation rate. CPI increased by 6.81% in October.

This recent spike has caused concern in the financial markets, more specifically the stock market, as it prompts the Fed to abandon its easy monetary policy and begin to tighten. In fact, the Fed has already announced it will withdraw its monetary stimulus faster than expected. This has made investors nervous, sending stock prices lower.

The PPI measures the rate of inflation for producers. Normally, PPI is below CPI. In fact, over the past 10 years, CPI has been higher than PPI 60% of the time. Even when PPI rose at a faster rate than CPI, the difference was minimal. This is not the case today as PPI (orange line) is much higher than CPI (see chart below). In short, production costs are rising at a much faster rate than consumer prices.

To explain, when producers are forced to pay more to produce their goods, as they are now, they have two choices. They can absorb the additional costs, which reduces profits; or pass these additional costs on to consumers. Since corporate profits are the lifeblood of stock prices, the more likely course is to pass these additional costs along to the consumer, which pushes inflation higher.

How Long Will Inflation Remain Elevated?

It’s a complicated question.

There’s COVID and its mutations. For as long as it is out there, things cannot operate as normal, at least not everything. That’s pushing people away from the city, forcing people to not work, forcing companies to shut down, forcing businesses to close.

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