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Long Run and Short Run Inflation

December 23rd, 2015

The Fed uses interest rates and inflation as two of their tools to control the American economy. The fed is constantly in limbo regarding the value of the US dollar. By manipulating inflation the fed can control how much the US consumer can purchase, however by allowing the US consumer to purchase more it also increases the rate of unemployment due to the fact that firms make less money whenever the inflation rate increases. Because of this balance, the inflation rate has a significant effect on the economy beyond the immediate foresight of the average US consumer. By knowing how the inflation rate are going to develop, one can assume future purchases and investments which best suit you personally as the consumer.

Even though the Fed’s 0.25% increase in the interest rate garnered the majority of the national media attention, it’s the global economy which requires more attention than most other subjects. China’s economy experienced better than expected home sales, industrial production, and retail sales, which basically means that their economy is not necessarily going under as earlier numbers projected, which will bode well for eastern foreign investments. the same unexpected improvement has occurred in Europe as well as the United States. Although the industrial industry was down, due to the fact that energy use has dropped due to the weather changes, the aerospace schedules and oil industry have been holding back results this quarter as far as the rate of production is concerned. in other words the economy is not falling as harshly as the numbers reflect, which is definitely good news for domestic investors. However there is definitely potential for a relatively alarming inflation rate increase in the coming months and years.

The Consumer Price index was about zero month to month during November, while the year over year inflation rates have moved up to 0.5% growth this week. Now depending on how commodity prices fare in the coming months, this number is projected to increase to 1% in January and 2% in June. This projection coupled with the labor market tightening, shortages in housing, and the soon to be stable commodity prices, display the potential for inflation to move higher outside of the Feds plan to gradually increase these rates. In fact inflation rates are predicted to move up to 3% by 2018 alone.

Not all the news is negative however, also these numbers are all projections and predictions which although have not come to fruition, are not to be taken lightly. the rush to beat these expected rate hikes could create a healthy growth for the United States economy, not to mention the annual increase in Consumer spending this time of the season should help the Consumer price index. Even though these rate hikes will most likely not be anywhere close to the inflation spiral of the 1970’s, it would be wise to have a plan ready in preparation of a three year spike of 3%. Call David Ortiz, registered investment advisor representative today and make sure that you are ready for whatever the future may hold.