Oh Nooo Not More Infaltion Garble...

When you are talking to your friends or are at the dinner table with family can you think of a type of conversation that, regardless of your personal experiences, gets everyone fired up? I’m willing to bet that this is the same kind of conversation that some of you flinch at when you hear the two magical prefacing words; “hypothetically speaking”. Part of the fun and frustration is that there is either no right answer or lots and lots of variables to consider. I have a conversation like that for us today. When the dinner time conversation turns to finance and the economy, inevitably someone is going to bring up inflation. Today I hope to give you some intellectual ammo in the event of an arm chair economist face off. Hypothetically speaking of course.

Today we are going to cover what inflation is, how it’s calculated and its different causes.  At the end of today though be sure to check out the link to the Massachusetts specific inflation page from the U.S. Bureau of Labor Statistics. Time to let the variables fly! 

Inflation is defined as the increase in the price level for goods and services over time.  The biggest tool that the Bureau of Labor Statistics uses to determine the changes in prices levels is the Consumer Price Index or CPI. Think of the CPI as a picnic basket full of goods and services that you, as a consumer, use every day. CPI takes price and weighted use of goods and services data from over 87 urban areas and 27,000 retail and service establishments to track changes in the economy’s price level. Within the CPI are categories that range from housing, rent, and new vehicle purchases all the way to the eggs, milk and bread you use every day. CPI measures price fluctuations as percentage changes from month to month and from fixed points like December 2008 and 1967. What setting points of reference allow economists to do is to find patterns and make conjecture about where inflation has been and where it might go in the future.  That conjecture is what the Federal Reserve and the current Administration use to make decisions on fiscal and monetary policy. The CPI gets the data it uses to calculate price changes from the Consumer Expenditure Survey put out by the Bureau of Labor Statistics. 

Let’s set up a small example that illustrates inflation at work. If on the news you hear that inflation has gone up 3% in the last year what does that mean for the consumer? Well for starters that $1.00 soda in the grocery store effectively costs $1.03. Inflation reduces the real purchasing power of your dollar, or it takes more dollars to purchase that same good. Inflation is not just about prices going up and I don’t want you to stop reading here and think that it’s all bad either. In fact in a healthy growing economy you need a certain level of inflation so that prices don’t get out of control and that workers all over the country get wages they deserve. Inflation as an economic indicator is used to mediate wages, adjust fixed income streams like Social Security, and affects the cost of your children’s school lunch programs.

There are basically two major economic causes for inflation, a Demand-Pull and a Cost-Push. Keep in mind we are covering the topics in brevity and making assumptions along the way like not considering demand elasticity, substitution, and market competition. When there is a Demand-Pull it implies there is too much money floating around in the economy chasing too few goods. People are willing to spend more for the same goods. When the news talks about worries of the Treasury just printing money or the debate over the effectiveness of stimulus checks being sent out to everyone they are referring to a Demand-Pull concern. The biggest part of that concern is that prices will rise too quickly, which is called hyperinflation, and imagery of an early 20^th Century Germany comes to mind with rapid devaluation of a currency and unimaginable bread lines. On the other side is Cost-Push which has more to do with the costs that companies have to incur in the production of goods and services and the ultimate effect on the price the consumer pays. Here the variables are more in line with resource scarcity like with timber and other natural resources that have inherently fixed amounts of inventory. The taxes on the raw materials imposed by the government and the cost of imports are also factors. Ultimately if the costs of production increase, with no foreseeable substitutes available, then the costs to the consumer will increase which implies inflation.

I hope you are starting to see why there are so many debates over what the causes of inflation at any given time actually are. With that debate goes the debate over what kind of policy should be enacted to address it at any given time as well. It’s a calculation that is much easier to see in hindsight when consumers have made their purchases and suppliers have shipped their goods. As promised take a look at how Massachusetts is doing compared to the rest of the country.  If you are still confused give one of my favorite economists and books read, its Naked Economics: Undressing the Dismal Science.  I think if you give Charles Wheelan a chance he makes this stuff fun and is extremely well spoken. 

Cheers! 

Just graduating or just starting? A quick list

Happy Tuesday!

I was just talking to a friend of mine who is going to be graduating and moving right into his professional role as a pharmacist.  He started picking my brain about things he should be thinking about when he graduates so that he doesn't just blow through all of his income.  From what I have heard about pharmacists they go from having the income of a part-time working student in college to making upwards of $100k their first year depending on their location.  As I was answering those questions I thought it would be a neat idea to post up some bullets just in case anyone else was in the discovering phase of their new financial planning obligations.  This too goes for anyone who might not have every thought about getting themselves organized.

1.) Setting up your companies retirement.  If your going to work in bigger firm odds are their company's HR department will be tossing lots of folders and packets your way with lots of deadlines.  For retirement it's a good idea to at least contribute enough to take advantage of any matching program your firm offers.  As far as stock purchase plans, or other stock based incentive programs if you are unsure start small, look for the minimums to participate and as you get more comfortable you can increase your contributions.  In the retirement plan you'll have lots of options and without giving any kind of specific recommendations try to diversify using large, mid, and small cap funds as well as a global that way you create some kind of diversity until you can have your in house or personal financial professional take a look.

2.) Your IRA.  If you are eligible I would recommend setting up a Roth, there aren't any deductions you can take as you contribute but it grows tax free and for the most part the withdrawals in retirement are also tax free.  Under certain situations you can access funds in it before retirement without any tax consequences as well and for more on it check out this IRS publication http://www.irs.gov/pub/irs-pdf/p590.pdf

3.) Automate your savings.  If you know you have a few different goals your saving for its ok to have a few different savings accounts.  If you want to vacation once a year, buy a home in five years, and a new car in three then have those accounts separate.  Right from your paycheck have amounts deposited that you feel will get you to those goals, just set it and forget them.  You can do the same for checking accounts and your bills. Having different accounts makes your savings easier to track and honor so that you aren't overspending.  When the time comes to buy that first home you know you'll have saved for it and can spend from it worry free.  Last note it's a good idea to have at least six months worth of expenses in an account in case of an emergency.

4.) Have fun.  After all that is said and done it's ok to go out and spend on the things that make you happy.  If you aren't enjoying what you worked so hard to achieve in school or working up the corporate ladder then you will drive yourself nuts thinking about all this stuff.  That's the great thing about automation, at the end of it you know exactly what your working with and you'll still cover everything that you have to.

4 1/2.) Credit.  Don't be afraid of it. Get a few credit cards and use them.  I know, I know you're thinking what kind of planner tells his clients to go out and wrack up crippling credit card debt.  That's not what I'm saying at all.  Throughout life so much is based on that little credit score number so like working out to get a better body we need to work your credit to get a healthier score.  Go out and pick up a few big ticket items and then break out the payments over the year.  Don't rush to pay it off.  The idea here is that you are demonstrating to credit companies that you are a positive credit risk and that in the future it will be easier for them to extend your credit lines or offer you great mortgage rates.  Before you get carried away though you might want to take a look at Credit Card Nation: The Consequences of America's Addiction to Credit.  It will  scare you straight.

I know I said bullet points but those were more like explanation points.  Please also note that things talked about here were in brevity, if you can believe that.  It was just to give an idea of some of the things you should start to think about.  If you want to know more about anyone thing feel free to shoot me an email or leave a comment. I love the feedback good or bad. And thanks to my friend for sparking that conversation!!

Cheers!

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Really...really..

Wow.

I am such a bad blogger. I really do want to make this a better blog and not let it just die.  I went back to actually reading about making blogs better and getting to the meat of what I'm passionate about so that I don't let this blog fade away.  One of my favorites so far has been Problogger.  I picked up ProBlogger: Secrets for Blogging Your Way to a Six-Figure Income and gave it a good read.  It's less about making an income blogging like so many bloggers aspire but more about ownership of your content.  I believe in spreading financial awareness but I, like everyone else, get so caught up in everyday to-do's that I don't give this blog the love it deserves.

I believe that researching why I've been so bad at this was the first step, a passive aggressive one, but a step none the less.  My next action item is to kick this blog into gear again.  Wish me luck!

Cheers!