Marketplace

Consumer Prices

Question: i understand that fuel and food prices are not included in the government inflation figures but are included in the consumer spending figures. why? Tommy. Waynesboro, GA

Answer: Energy and food are included in the Consumer Price index. The CPI tracks the average price level in the U.S. Government statisticians pick a representative basket of goods and services that mirrors the spending pattern of the typical household.

The reason you would think otherwise is that many economists strip out energy and food prices to highlight the so-called "core" rate of inflation or core-CPI. (The Bureau of Labor Statistics does it for you when they come out with the monthly CPI figures, too.) Energy and food prices are very volatile, and by taking them out of the equation economists can see better what is happening to prices in the rest of the economy. For instance, despite dramatic increases in food and energy prices it has been tough for many companies to charge consumers higher prices. That lack of pricing power largely reflects and intensely competitive global economy.

Still, when it comes to the strain on our everyday wallets the overall CPI captures what we are experiencing better than the core rate of inflation.

05/27/08 by Chris Farrell

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Recession? Or Not?

Question: I write a personal finance blog (pfblueprint.com) and one of the things that my readers have been mentioning a LOT has been the true state of the economy. The official figures indicate that we aren't technically in a recession but all the headlines scream recession. There are headlines every day about banks are failing, 1 in 171 homes is in foreclosure, the deficit next year will be half a trilling bucks, oh, and the sky is falling. So what's the deal? Thanks, Thanks! Jim in Maryland

Answer: I am in the camp that believes we are in a recession. Yes, government statisticians recently reported that the economy is expanding at a 1.9% average annual rate. And it takes the National Bureau of Economic Research--the official arbiter of when and if the U.S. economy is in recession--between 6 month to 18 months after a downturn begins to label it as a recession.

Still, the job market is weak, and getting worse. Layoffs are hitting more industries. Home prices keep spiraling lower, and we haven't seen bottom yet. The credit turmoil in the financial system is spreading, most recently reaching the credit card market. Consumers are strapped for cash, with higher energy and food prices sapping budgets. Exports are one of the few bright spots in the economy.

What's more, official history is being revised downward. It's intriguing to note that when the government revises previously published statistics the figures are usually worse than initially reported. For example, the fourth quarter of last year was recently revised down to negative growth: -0.2% from the previous 0.6%. Mike Mandel, chief economist at Business Week, has been making a strong case over at his blog that the consumer spending figures are too high.

It feels like a recession. It looks like a recession. And eventually I think it will be labeled a recession.

08/05/08 by Chris Farrell

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How to protect against inflation

Question: I hate to see this happen to the Obama administration; however, if you combine the debt created by the Bush era and the deficit spending (a.k.a. Stimulus Package and Bail Out packages) that Washington is embarking on, how can we not repeat the sky high interest rates that folded the Carter administration where cash was king accompanied by nose bleed inflation rates--especially since manufacturing has all but left these shores for cheap overseas labor? Thank you. Stephen, Cape Neddick, ME

Answer: Many people in the markets are worried that the Fed's quantitative easing will end in a bout of high and rising inflation. Still, it seems to me the fear that inflation lies around the corner is exaggerated. The economy is still weak if not in recession and unemployment is rising. Now, it's likely that inflationary pressures will emerge when the economy finally regains its footing. It's a safe forecast that at some point down the road the Fed will confront a tricky monetary policy act. I'm sure we'll go through some inflation scares. But the Fed is well aware of the risks and, while the conduct of monetary policy is as much an art as a science, Chairman Ben Bernanke thoughtfully discussed the central bank's "exit strategy" in Congressional testimony earlier this week.

But high and rising inflation or hyperinflation? Personally, I don't see it. For instance, the U.S. government's Treasury Inflation Protected Securities or TIPS are forecasting that inflation will average less than 2% over the next decade. You would think investors would demand more of an inflation hedge if the threat of hyperinflation was real. The global competition for profits and markets is intense and that competition will aid central banks around the world in keeping inflation tame. I still think the long term trend is toward minimal inflation rates in an increasingly integrated world economy. Plus, central bankers have a pretty good intellectual tool kit when it comes to bringing inflation under control. What central bankers don't really understand, what they disagree on is how to handle bubbles, market booms and market busts.

That said, the risk of high and rising inflation exists over the next 5 years or so considering the extraordinary actions the Fed has taken to bail out the banking system and avoid a depression. Even small rates of inflation, say, in the 2% to 3% range, reduce the purchasing power of savings with time.

So, since we're dealing with personal finance questions here what's a good way to protect your savings from inflation? A portfolio made up of mostly Treasury bills does an excellent job of keeping pace with inflation. However, the price for that inflation hedge is no growth or no earnings premium over inflation. Most of us would like to make some money on our money. That's why the key investment product for long-term savers is TIPS. Everything can be built on top of a foundation of TIPS. For those who want to take greater risk in the search for higher rewards should allocate a larger portion of their portfolio to stocks. For those who are more risk adverse a larger investment in Treasury bills makes sense.

07/23/09 by Chris Farrell

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Reward companies not Wall Street

Question: I will retire this year at age 65. My husband and I are both conservative financially. We own outright our farm and two rental properties. I moved all the assets in my 401K to a cash account two years ago, so I have not suffered loses there (a good thing since I work for AIG!). I realize I must move some money into equities to keep up with inflation over time, but I don't trust any financial advisor (I have some experience) and I certainly don't want to invest in a way that will pour money into the coffers of Wall Street analysts and traders. Here is my question: when one invests in stocks (funds or individual) on the NYSE or Nasdaq, does Wall Street automatically profit? I want to 'Invest in America,' but I don't want to reward unethical financiers. I bet there are a lot of small investors who feel the same way I do. Thank you for any words of advice. Melinda, Burns, TN

Answer: Many people agree with you. And I imagine you have some stories to tell about living through all the turmoil at AIG.

Wall Street profits in most cases when it comes to buying stocks. But there are ways to limit the amount that goes into the pockets of financiers.

Now, you already know this, but to reiterate: When you buy publically traded stocks the money usually doesn't go to the company. The investor who sells the stock gets the gain or the loss. Companies get investor money during an initial public offering (IPO) and with any subsequent additional sales of shares. However, it's easier for a company to get access to capital--such as borrowing--when investor show their enthusiasm for its business by bidding up its stock price.

With funds, one way to limit Wall Street's gain is to buy a major stock index, either through a mutual fund or an exchange traded fund. The annual fees on both types of fund are razor thin. You can take another step in this direction by purchasing socially responsible index funds. This kind of investment combines low fees along with putting your money into companies you like and managements you'd like to reward.

With an index fund you aren't paying for the services of a professional money manager or advisor. You're your own money manager.

With individual shares, I wonder if it would work for you to buy stock directly from a company? There are a number of large companies, typically major national and multinational corporations, that offer shareholders direct purchase plans--you can buy company stock without going through a broker.

You can learn more about companies offering this kind of plan by going to betterinvesting.org. It offers a long list of companies with direct purchase plans, starting with 3M and ending with Zion Bancorporation. (Betterinvesting is the website for the National Association of Investors Corporation, the umbrella organization for many investor clubs).

I do believe that there are many ethical financial firms in the country, from many credit unions to a number of mutual fund companies. I'd do business with financial companies with a strong track record of good service and low fees, along with a proven willingness by management to steer clear of fads that eventually harm customers.

One last point: Do you need to invest in stocks to stay ahead of inflation? Don't get me wrong. I am a big fan of equities. But would purchasing Treasury Inflation Protected Securities--a hedge against inflation--be a better bet for you? It's worth exploring.

11/16/09 by Chris Farrell

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