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Are you worried about inflation?
No, well, it would appear that there are those who are. In fact there are enough people worried about inflation that there is a group in the United States dedicated to teaching people about the subject. They answer any questions a concerned American public might have about inflation – and the economy in general.
As one might expect the body is called the National Inflation Association. In its About Us ‘mission’ statement it describes itself as “an organization that is dedicated to preparing Americans for hyperinflation.”
It also offers ” articles about the economy and inflation, news stories, important charts not shown by the mainstream media”.
The association also goes on to say that it offers “profiles of gold, silver, and agriculture companies that we believe could prosper in an inflationary environment”.
However, with the Dow Jones Industrial Average reaching the psychologically all-important 10000 mark in October the real question is just how busy will the NIA be in the coming weeks and months ahead. Will the US economy – and indeed the rest of the world – face inflation, deflation or stagflation as a result of what is happening in the world economies?
The case for inflation is fairly strong at the moment because there is so much money in circulation. After all the United States government has pumped oodles in to its economy to stave off the collapse of the financial system.
Inflation – which is the increase in price of goods and services (excluding property) – essentially erodes the consumer’s purchasing power. And now that there is so much money in circulation this is a very real threat. The purchasing power of the dollar is diminishing.
One popular measure of inflation is the CPI – the Consumer Price Index. According to the United States Department of Labor “on a seasonally adjusted basis, the CPI-U increased 0.2 percent in September after rising 0.4 percent in August. The index for all items less food and energy increased 0.2 percent in September after increasing 0.1 percent in August.” This would indicate that prices for urban dwellers have been on the rise the past few months.
When prices rise and the value of the dollar sinks investors generally look for safe havens. One of the most sought after safe havens is gold and low and behold quite recently the price of gold hit an all time high. Some say its set to soar further because of the risk of inflation.
However, before you go out and buy as much gold as you can afford consider the other side of the coin – deflation. After all demand in the United States is weak – and so is the dollar. This would indicate that prices have to come down rather than go up.
Deflation – which is the decrease in the price of goods and services – increases the consumer’s spending power. During times of deflation the consumer can buy more for less. While a recession should bring about deflation government spending, the rising price of commodities and an overall reluctance to let the dollar slide might prevent this from happening.
Lately we have seen the dollar decline as a result of all the spending being done by the United States government. We have also heard plenty of discussion about the dollar losing its place as the global reserve currency. However, we have also heard that it is not in the Chinese government’s interests (as a holder of significant amounts of dollars) to see the value of the dollar deteriorate. In addition commodities continue to rise which keeps the cost of products and services up. Another word creeping in to the inflation-deflation debate right now is stagflation. This is when inflation and economic stagnation occur at the same time.
Stagflation occurs when the price of a particular commodity – such as oil – increases the price of products while slowing the growth of the economy.
Stagflation can also be caused by economic policies. In particular stagflation can be caused by permitting excessive growth of the money supply or by enforcing significant regulation of the markets. Sound familiar?
During periods of stagflation there is slow economic growth coupled with increased prices and a rise in un-employment. It is a very difficult cycle to break.
It is also difficult for ordinary folk to ‘second-guess’ the markets let alone the overall direction of world economies. Therefore those who have an interest in investing for their future should continue with their plan. The best approach – as always is to put something away each month. That way you don’t have to worry about any trend – be it inflation, deflation or stagnation. You can leave that to the NIA.
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