Back in the 18th century, lighthouse keepers were stationed at strategic shorelines to warn ships of hazardous waters that required special skill and experience to navigate. Technology has now made this job obsolete even though the same potential dangers still exist.
From a financial standpoint, increases in the Consumer Price Index, or CPI are the dangerous waters that all investment portfolios need to navigate through, in order to maintain purchasing power. Maybe the Bureau of Labor Statistics is our Lighthouse Keeper, but who is the captain of your investment ship, navigating the choppy waters?
The CPI measures changes in the price level of a market basket of consumer goods and services purchased by households. As defined by the Bureau of Labor Statistics, this “market basket” is made up of 8 basic subgroups: food & beverages, housing, apparel, transportation, medical care, recreation, education and communication.
This all becomes important when one considers the effect that the Federal Reserve programs of QE1, QE2, and QE3 have had on our economy, and the potential that the end of these programs will have on inflation. I will not argue the benefits that these programs have had on helping the US economy since 2008, but as a financial lighthouse keeper, I say that there could be dangerous waters of inflation looming.
At Karp Financial Strategies, in our long term financial plan assumptions, we use 3.5% inflation to account for the increase in prices of the things we buy, to guard against the potential to run out of money. In 2010, the CPI ran approximately 1.5%, rose to 3.0% in 2011 and then dropped to 1.7% in 2012. As recent as 7/16/2013, in an Economic New Release, the Bureau of Labor Statistics released its unadjusted rate of 1.8% for the previous 12 months ending June, 2013.
Where do we go from here as the Federal Reserve programs, as forewarned by Ben Bernancke, will come to an end? Will the CPI (inflation) revert to more normal levels, causing an increase in the prices that we pay for goods? Does this mean that the price of gold will increase again, as it can serve as an inflation hedge?
Like the lighthouse keeper, we feel that our responsibility is to send out a warning that there are potentially dangerous waters to navigate. The tides are changing…are your charts up to date? We welcome the opportunity to visit with you to discuss how we are positioning for this and other issues.
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.