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Kimberly Amadeo

Mild October Inflation Good for Holiday Retail Sales

By November 17, 2012

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Prices barely budged in October, rising a scant .1% in October.  Minuscule increases in fuel oil (1.1%), apparel (.7%), and  transportation (.7%)  were offset by a .6% decline in gas prices.  Natural gas prices also dropped (.2%), as did prices for new (.1%) and used (.9%) cars and trucks. These lower prices came just in time for Black Friday and the holiday shopping season. Less money spent on gas frees up funds for holiday purchases, expected to rise 4.3% this year.

However, this low month-to-month inflation rate does not assuage fears that the Federal Reserve's aggressive expansive monetary policy is just paving the way for inflation next year.  They point to higher year-over-year price increases. Although prices rose a moderate 2.2% in the last year, it was driven by large increases that aren't likely to come down -- a 9.1% increase in gas prices, and a 3.9% increase in health care costs. (Source: Bureau of Labor StatisticsConsumer Price Index, November 15, 2012)

Why not?  Continued unrest in the Middle East, as evidenced by this week's clash between Hamas and Israel in Gaza, prompt anxious commodities traders to keep bidding up oil prices. Demand for health care will keep rising as the population ages, outpacing Obamacare's promises to lower overall costs. In fact, some still argue that the costs of Obamacare itself outweigh its benefits.

What It Means to You

Despite higher costs in some areas, there is no reason to fear future inflation or even hyperinflation. The Fed can easily reign in the money supply by using contractionary monetary policy. Of greater concern to you is wage compression. That's when high unemployment reduces the need for businesses to offer higher wages. This means that, over time, your salary won't keep up with price increases everyday items like gas and food prices. If your income is flat or declining, even mild inflation will eat away at your standard of living.

What to do? First, don't fall for scare tactics, such as putting all your savings into gold. Second, keep looking for ways to improve your skills so you can beat the competition in scoring a better job. Third, cut costs wherever possible, especially in high-ticket items like cars and housing. Fourth, take advantage of help and advisers wherever possible. This includes a job coach, career consultant and financial planner.

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