by Patrick Morgan

As consumers, we have all experienced the effects of inflation. One dollar ten years ago doesn’t go as far today, and conversely, one dollar today won’t go as far in ten years. Inflation affects us all; from our trips to the grocery store, to our yearly salary increases, to the mortgage interest rates we pay when shopping for a new home. Inflation is something that is closely measured by the government with the Consumer Price Index (CPI), which affects everything from social security payments and union labor agreements to the returns on tax-free inflation protected bonds.

Each month, the U.S. Bureau of Labor Statistics gives us two numbers – CPI and Core CPI. CPI is a measure of the average change in prices over time in a fixed market basket of goods and services and it is the primary means of gauging inflation. It is based on the prices of the goods and services that people buy for day-to-day living. Core CPI measures the same basket of goods minus the more volatile food and energy prices.

For the typical household the overall CPI is what matters, as it measures the rate at which the cost of living is increasing or decreasing. However the Federal Reserve and many economists tend to focus more on Core CPI, in part because it is less volatile and provides a more accurate gauge of the underlying rate of inflation that emerges in the absence of volatility. Significant rises in CPI, especially Core CPI, could push the Federal Reserve to raise interest rates in an effort to curb inflation. A certain amount of inflation is expected in a growing economy. Since 2000, the U.S. has averaged just below 2.8% inflation on a yearly basis.

There are growing inflationary concerns today and it is important to remember that one of the keys to achieving your long term investment is to outperform inflation.