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Kimberly Amadeo

The Best of Times — Low Inflation AND Low Interest Rates

By January 17, 2013

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Inflation remains low, despite years of the Federal Reserve's quantitative easing programs. Prices overall did not rise a bit in December, thanks to lower gas prices. In fact, the prices of many things dropped in December: used cars and trucks fell .4%, clothing was down .1%, and health care equipment fell .5%. These price drops offset moderately rising prices in natural gas (up 1.3%), transportation (up .4%) and health care services (up .3%). All in all, a month where prices didn't fluctuate greatly.

Year-over-year, prices were up a moderate 1.7%.  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 (1.6%). The only areas that are cheaper than last year are energy services, such as electricity and natural gas, (down 1.1%)  and used cars and trucks (down 2%). The reason behind most of these price increases is gasoline and oil, which were up 1.5%. When oil prices rise, so does just about everything else since it is such a large component of our economy. (Source: Bureau of Labor StatisticsConsumer Price Index, January 16, 2013)

What It Means to You

Unfortunately, gas prices have already hit bottom and are trending higher. This eventually translates into higher food prices, which is trucked great distances. Expect a jump next month, especially if there's more saber-rattling from Iran.

Other than that, enjoy this unusual period of low interest rates AND low prices. Usually, low interest rates translate to inflation, as too much cash and credit floods the economy. However, growth isn't strong enough to kick off inflation. Therefore, we are in that lull before the Fed can raise interest rates. This lull could last all year, since the Fed said they don't expect to raise rates until 2014.

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Understand Quantitative Easing

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