Inflation: Your Wallet and the Overall Economy

The Personal Income and Outlays report for April 2013 was recently published by the Bureau of Economic Analysis. According to the data, the year-over-year inflation rate fell to an all-time low of 1.05% based on the core Personal Consumption Expenditures (PCE) price index, which excludes food and energy prices due to their volatile nature. This is the lowest annual core PCE increase ever reported; the previous low of 1.06% was reported more than fifty years ago in March 1963. Including food and energy, inflation was even lower at 0.74%.

Inflation is defined as the rate at which the general level of prices paid for goods and services rises over a period of time. Rising inflation means the cost of goods and services has increased, which leaves the consumer with less purchasing power because every dollar spent will purchase a smaller percentage of a good or service. If low inflation means smaller price increases and greater purchasing power per dollar, wouldn’t such an environment be one we should strive to maintain? Why does the Federal Reserve choose to target inflation at 2.0 percent?

While low inflation allows consumers to purchase more goods with their dollars, its effects extend far beyond the consumer’s wallet and some Federal Reserve officials are worried these conditions could spell trouble for our economy going forward.

Look for a more in-depth analysis in the Summer Issue of Valuation Viewpoint, available August, 2013.