Should You Worry About Inflation?

For months the financial media has been screaming about inflation — that is, the U.S. dollar’s declining purchasing power.

But how bad is it, really? Is the inflation simply a result of the economy recovering from pandemic lockdowns? Should we worry or not?

Let’s look at the actual numbers.

There are two main measures of inflation: PCE (Personal Consumption Expenditures) and CPI (Consumer Price Index).

PCE measures U.S. household expenditures. This is what the U.S. Federal Reserve Bank looks at to determine its policies. It factors in whether people are spending and how much.

In the chart below, you can see:

• the actual PCE (blue line)

• what the PCE would be if we had hit the Fed’s 2% inflation target since June 2011 (orange line)

• and what the PCE would be if the pandemic had never happened and the PCE grew at 2% (gray line).

CPI factors in the average price of things in the U.S., like rent, utility bills, cigarettes, bacon, cars, etc. 

The chart below is the same as the above, but showing the real CPI vs. what we should have expected since 2011:

Here are the big takeaways I’m seeing… 

1. Yes, we’re seeing inflation rising faster than we would expect, had there been no pandemic.  

2. No, inflation is not higher than what we should have seen had things been “normal” for the last 10 years.  

3. But once we go past that 2% benchmark? We are officially in the inflation “Danger Zone.”

So, if you’re looking at these charts and asking, “Should I be worried about inflation?”

The short answer is — not yet.

But considering the PCE only needs to grow by 4.07% in the next month to cross into the Danger Zone, and the CPI only needs 1.62%...

We’re pretty darn close to the time when we should worry.

You may be asking at this point:

“HOW DO I INVEST TO PROFIT FROM RISING INFLATION?”

Buy Treasury Inflation-Protected Securities (TIPS), or the iShares TIPS Bond ETF (NYSE: TIP)

I’ll let you know in the future if we venture too far into the inflation Danger Zone.