Fed Seeks Ingredients for the Perfect Inflation
By Joseph A. Clark
NEW YORK (AdviceIQ) -- Most people think inflation is bad on its face. But one school of economic thought holds that a little inflation is a good thing, if it is confined to assets such as stocks and real estate. It's when it spills over to the supermarket or gas station that no one is an inflation fan.
Our central bank's policy is to goose asset prices, thus getting the sluggish economy finally moving, but that kind of precision is a tall order and there are other factors in inflation -- such as the weather distortions this year, which created more than just travel and meeting interruptions. The extreme drought in the West led to the loss of cattle and crops. This in turn spurred commodity prices higher.
The bill at the grocery store is rising faster than many household budgets are prepared to absorb. I asked my wife what she thought about inflation, and her response was less than positive.
The Consumer Price Index overall rose 1.1% in February, and food was up 0.4% four times the rate of the month before. Prior months were 0.1% or zero. U.S.-grown food inflation is worst among meat and dairy, and coffee is way up thanks to a drought in Brazil.True enough, inflation raises the price of goods and services, but that in itself does not make inflation all bad. Again, I asked my wife if she wanted assets such as the value of our house and investments to appreciate. She replied: Sure, but what about food costs? 2% yearly, the Federal Reserve is eager to avoid higher numbers such as 5% or more. It remembers how it had to drag the nation through a bad recession to wring out the virulent double-digit inflation of the 1970s. But the Fed governors do need battered home values to rise. Real estate is a key part of the economy: Its slump triggered the 2008-09 financial crisis and almost wrecked the banking system, which functions as the economy's blood supply. Banks lend more money for houses than they lend for family vacations. They charge greater interest for a personal loan than a home loan. Why? While you return from vacation with great memories, the bank has no asset to protect future repayment of the vacation loan. In contrast, the house historically furnishes solid collateral if you fail to make good on the promise to pay. That's provided the house appreciates or at least remains stable in value. If the value of the house falls -- think 2008 -- the asset is worthless as collateral. The value falling is considered deflationary. The Federal Reserve put on a full court economic press with QE, adding more than $3 trillion to its balance sheet, aiming to keep asset prices higher and avoid deflation. Yes, it wanted job growth too, but it mostly needed asset prices to move higher. It needed to create inflation and did. firstname.lastname@example.org, or (765) 640-1524. Follow him on Twitter at @Big Joe Clark and on Facebook at here. AdviceIQ delivers quality personal finance articles by both financial advisors and AdviceIQ editors. It ranks advisors in your area by specialty, including small businesses, doctors and clients of modest means, for example. Those with the biggest number of clients in a given specialty rank the highest. AdviceIQ also vets ranked advisors so only those with pristine regulatory histories can participate. AdviceIQ was launched Jan. 9, 2012, by veteran Wall Street executives, editors and technologists. Right now, investors may see many advisor rankings, although in some areas only a few are ranked. Check back often as thousands of advisors are undergoing AdviceIQ screening. New advisors appear in rankings daily.
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