By Zach Scheidt
This post Inflation vs. Your Retirement appeared first on Daily Reckoning.
Look out, inflation is coming!
Is your investment account ready?
This week, the minutes from the most recent Fed meeting were released and “almost all participants” saw inflation moving towards their 2% goal.
This is a very important topic to understand if you want to protect the wealth you’re building through dividend stocks.
So today, I want to talk a bit about why investors are worried about inflation and what this means for your retirement…
Good Inflation Versus Bad Inflation
We’ve been taught that inflation is a bad thing for most of our lives. That’s because it seems “wrong” that things cost more and more over time. Especially if you’re living on a fixed amount of savings or income and inflation makes it harder for your resources to stretch.
But did you know that inflation isn’t always a bad thing? In fact, a moderate amount of inflation is actually considered a good thing for the economy.
Good inflation occurs when an economy is growing and there is more demand for important things like food, manufactured products, energy and even human capital. As demand picks up, people and businesses are willing to spend more for the things they need. And this steady rise in demand can trigger higher prices — or inflation.
One of the first signs of inflation we saw this year — the one that is partially to blame for sending the market lower — is an uptick in wages. For the month of January, U.S. wages rose an average of 2.9% over the same period last year.
Do you think the millions of workers who have received a 2.9% boost to their paychecks consider this “bad inflation”?
Certainly not!
These wage increases are part of a healthy, growing economy that is willing to pay more for the work that individuals do. It also helps that tax cuts have left corporations with more cash to spend on higher hourly wages, higher salaries, bigger bonuses and other employee benefits.
Today’s level of inflation is right in the sweet spot for a growing economy. It’s not too hot and not too cold. If inflation were to move sharply higher, we’d have to worry about whether individuals could afford higher costs of living. And if inflation were to move sharply lower, it would be a worrisome sign that the economy isn’t growing as robustly as we thought.
But for now, I’m very comfortable with the level of inflation we’re seeing today.
Higher Inflation Leads to Higher Interest Rates
One of the reasons investors reacted poorly to the January wage increase is because inflation naturally leads to higher interest rates. And higher interest rates can sometimes cause problems for businesses and the economy.
There are two reasons why interest rates track closely with inflation.
The first one is “natural.” In other words, it occurs because of free market forces.
When inflation starts to kick in, consumers have an incentive to spend money quickly. After all, if you save your money, it will lose value if inflation is very …read more
Source:: Daily Reckoning feed
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