January CPI: Does Inflation Really Matter Anymore?

With inflation having been low for so long, does it still make sense to pay attention to the Consumer Price Index? Find out here.

Feb 20, 2014 at 12:30PM

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Every month, the Bureau of Labor Statistics releases the latest update on the prices that consumer pay for a wide range of products and services. Yet with the Consumer Price Index having been so low for so long, some wonder whether we'll ever again see the inflationary pressure that drove the Dow Jones Industrials (DJINDICES:^DJI) and other stock markets to poor performance in the 1970s and early 1980s. What many investors don't realize, though, is that the stocks of the Dow Jones Industrials actually give them at least some protection against inflation that bonds and many other investments lack.

Why inflation has been a non-issue lately
Today's news that the CPI rose 0.1% is consistent with the relatively tame inflation that we've seen for years. In the aftermath of the financial crisis, price levels stopped rising entirely for a couple of years, with actual deflation in certain months. That had an impact on millions of Americans whose wages or Social Security benefits are linked to the CPI, with retirees in particular seeing no cost-of-living adjustments for either 2009 or 2010.

Many economists have looked at the lack of wage increases as one reason why inflation has stayed low. Despite efforts from the Federal Reserve to add liquidity to the financial system and spur what in ordinary times might be inflationary pressures, employment gains have been tepid at best, with falling unemployment rates stemming more from an exodus of participants from the labor force than from strong job creation. Moreover, with the Fed now starting to ease off on its stimulus activities, the danger of inflation looks smaller than ever.

Don't declare inflation dead yet
The Fed's diligence in targeting a 2% inflation rate strongly suggests that the central bank would make every effort to fight inflation if it comes back. As the economy strengthens, demand for skilled labor should increase, putting workers in a better position to get higher wages and creating competition among employers for the best employees. If higher wages filter through the entire economy -- as it has in certain areas of the country where economic activity is at its strongest -- then inflation could become a threat again.

But the reason why Dow investors shouldn't worry as much about inflation is that many of its component stocks have the pricing power to pass through cost increases to customers. For instance, consumer-brand giant Nike (NYSE:NKE) already commands a high premium for its finished products compared to its costs of production, and so inflation can actually provide cover for the athletic-apparel maker to raise prices and boost margins.

Inflation also spurs corporate customers to find ways to cut costs, and that can help the companies that provide more efficient solutions. Boeing (NYSE:BA) is a good example, as the aircraft maker has already reaped big rewards from airlines seeking to cut their fuel costs by ordering new, more fuel-efficient models. A high-inflation environment could accelerate that trend, helping Boeing justify raising prices on its aircraft in order to meet higher production costs.

Of course, not every stock in the Dow benefits from inflation. Wal-Mart (NYSE:WMT), for instance, could see some gains from new customers looking for ways to economize in a rising-price environment. But rising supply costs could force it to raise its prices to maintain its already razor-thin margins, and that could alienate customers at the time when they need the retailer's low-cost promise the most.

Keep watching
Inflation might be subdued for now, but you should still remain diligent in tracking the CPI and other measures of inflation. Even though it's been a long time since high inflation hit the economy, those who remember its effects know all too well why it's worth the effort to keep it in check.

Beat inflation with investment income
One of the secrets that few finance professionals will reveal is that dividend stocks as a group handily outperform their non-dividend paying brethren. That's especially helpful when you're trying to get as much income as you can when prices start to rise. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Nike. The Motley Fool owns shares of Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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