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COVID-19: The Foundation for Inflation in the US

  • Inflation is on the rise in the US: what are the potential market implications?

As our country’s economy recovers from the COVID-19 pandemic, there has been a growing threat of inflation. A key indicator, the Consumer Price Index, is up a record high of 4.2% from last year, which is the quickest increase the economy’s seen in over 12 years. The last time the US witnessed inflation at this level was following the financial crisis in 2008.

What are Inflation & CPI?

Inflation refers to the decline in the purchasing power of a specified currency over a period of time.

Consumer Price Index (CPI) attempts to quantify purchasing power by looking at increasing price levels of a basket of selected goods. 

Market basket goods are items or assets selected to track the performance of a specific segment within the market over a given time frame. According to the Bureau of Labor Statistics’ report, there were price increases found within all selected categories this year except for medical care commodities. 

Specific categories which have seen major increases in the past year:

  • Energy: 25.1% increase
  • Used cars and trucks: 21.0% increase
  • Airline fare: 9.6% increase

What Does This Mean For The Economy?

At the start of the pandemic, the Fed lowered its benchmark interest rate to zero and has been buying bonds back in an attempt to keep cash flowing into the economy. The Chair of the Federal Reserve, Jerome Powell, believes this inflation is transitory. As such, the Fed plans to continue with these tactics for the time being, hoping that it will set the market up to thaw from the heat of inflation.

There are a multitude of financial implications that come from inflation, with many different potential courses to chart depending on your financial and social standings. For example, inflation negatively and directly affects your purchasing power and lowers the values of pensions and treasury notes. However, assets such as real estate and precious metals will typically keep up with the inflation rate, effectively lessening or cancelling the effect of inflation on them.

Make sure you’re prepared for the uncertain economic future with the help of one of our financial advisors here at DSJ. Call 516-541-6549 to speak to an advisory professional and visit our website to stay up to date on all current news.

 
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