Despite massive quantitative easing by the Federal Reserve over the past few years, inflation is less of a threat than ever. In November, prices actually fell .3%, thanks to a 7.4% decline in gas prices. It seems commodities traders have more of an impact on inflation, and its equally-ugly twin deflation, than the nation's central bank. This was good news for retailers, as lower gas prices means more cash to spend for the holiday shopping season.
It might not feel like deflation because year-over-year prices increased by 1.8%. Most of this was due to the usual culprit, health care services (up 3.7%). The cost of nearly everything else is also higher than last year, from food (1.8%) to apparel (also 1.8%) to new vehicles (1.4%). The only areas that are cheaper than last year are energy services, such as electricity and natural gas, (down 1.7%) and used cars and trucks (down 2.3%). The reason behind most of these price increases is gasoline and oil, which were up 1.7%. When oil prices rise, so does just about everything else since it is such a large component of our economy. (Source: Bureau of Labor Statistics, Consumer Price Index, December 14, 2012)
What It Means to You
Enjoy the seasonal drop in prices. Each spring, gas prices rise as traders anticipate the summer driving season. After about six weeks, higher gas prices translate to higher food prices. Why? Because transportation costs are a large component of food costs.
If we get another threat from Iran, like we did last year, expect oil prices to rise even sooner. Last year they started peaking in February. Oil price increases also take about six weeks to translate in higher gas prices. So, keep a lookout for these kinds of trends.
What can you do about it? Unless you have a place to store gasoline, not much. However, you can talk to your financial planner about getting or adding to a fund that focuses on commodities. That way, when prices go up, so does your portfolio -- offsetting what you put into the tank.
Inflation Related Articles
- Causes of Inflation
- Demand-pull Inflation
- Cost-push Inflation
- Types of Inflation
- Current Inflation Rate
- How the CPI Is Calculated
Understand Quantitative Easing
- What Is QE1?
- The Federal Reserve's Quantitative Easing 2
- Operation Twist
- The Fed's QE4 Buys More Time for Fiscal Cliff Resolution