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What's going on?
Everyday prices for Americans rose at their fastest pace in two years in October versus a year earlier (i.e. inflation increased), but that doesnt tell the whole story
What does this mean?
A major factor pushing up inflation is the higher price of gasoline, which is a result of the recovery of the oil price from its low point back in February. However, the inflation rate that economists and the US Federal Reserve pay closest attention to is core inflation, which ignores the effect of volatile things like energy and food prices. Core inflation gives a better read of the underlying inflation trend – and it is not accelerating (compared to earlier this year).
Why should I care?
For the markets: Whether or not inflation is increasing is hugely important to investors.
Inflation is the rate at which the value of money erodes: the higher the rate of inflation, the less a $10 bill will buy you in a years time versus today. For that reason, inflation is typically bad for bonds (an investor who buys a bond has lent money; when that money gets repaid, its not worth as much). Although its not happening yet, many investors think core inflation will accelerate in the future. Watch this space closely.
The bigger picture: So is inflation good or bad?!
Generally speaking, a little bit of inflation is a good thing, especially if its being driven by things like wage gains (rather than, say, higher gas prices, which act like a tax for most people). If higher wages are allowing people to spend more money, then companies can raise prices moderately and everyone (sort of) wins. But too much inflation can be destabilizing, e.g. substantial price increases hurt peoples wallets and cause them to buy less stuff. With core inflation currently at 2.1% in the US, it appears to be at a healthy rate.
Originally posted as part of the Finimize daily email.
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