Exponential Inflation

When you wake up each morning in America (assuming that that's where you wake up), do you thank your lucky stars that you live here? Here's one reason why you might want to: inflation.

Yes, inflation in the U.S. has been steep at times. But over the past 50 years or so, it has only entered the double-digit territory a few times. (In the late 1970s and early 1980s, for example, it posted annual gains of around 10% to 13% for a few years.) Overall, though, our average annual gain has only been around 3% or 4%, making the price levels in the U.S. today some four to five times what they were in 1972. That's quite different from elsewhere in the world.

At marginalrevolution.com, for example, I recently ran across a speech by Federal Reserve Board governor Randall Kroszner, who noted, "The price level in Brazil is approximately 5 trillion times higher today than it was in 1972." A decade or two ago, inflation was around 100% per year in Mexico. That's a tough way to live. Venezuela today is facing estimated inflation rates of some 15% per year over the coming years. (One way that businesses survive in such environments is to not publish prices, such as on books or magazines. Instead, they publish a code, which consumers can use to look up the latest price. So a price labeled AB14, for example, might mean $1.50 today, and might reflect a $1.65 price next month, and $3.25 next year.)

Fortunately, runaway inflation is under control in much of the world now. (Kroszner credits "globalization, deregulation, and financial innovation" for that.) Still, it's worth pausing to appreciate the relative stability that we've experienced here in America for so long.

Ramifications
When you go about your financial life, it's good to keep inflation in mind, at least now and then. For example, when socking money away for retirement, consider the impact of inflation. If you think you can live well on $40,000 in retirement, for example, remember that if inflation clocks in at an average 3.5% over the coming 25 years, you'll want an annual income of $94,500 come the year 2032. So plan your investing accordingly. If your returns are not surpassing the inflation rate handily, you may have a rougher retirement than you expected. (Get lots of retirement planning guidance in our nifty Rule Your Retirement newsletter, which you can -- and should -- try for free.)

And if you're thinking of investing in foreign companies, do so carefully, considering the stability of any country you're looking at, along with its accounting regulations and other political and economic factors. If that's too daunting a task, consider test-driving our brand new Global Gains newsletter, which will do the digging for you as it aims to unearth some of the globe's best investment candidates.

Countries that have had out-of-control inflation shouldn't be written off; they can offer compelling investments. Look at Brazil, for example. The exchange-traded fund (ETF) iShares MSCI Brazil Index (AMEX: EWZ  ) , which invests in an index of Brazilian companies, has averaged gains of 32% per year over the past five years. The broader iShares S&P Latin America 40 Index (AMEX: ILF  ) has gained an average of 30% per year in that period, and holds companies such as Petroleo Brasileiro S.A. (NYSE: PBR  ) , Empresa Brasileira de Aeronautica S.A. (NYSE: ERJ  ) (sometimes known as Embraer), and Mexican cement giant Cemex (NYSE: CX  ) .

Learn all about ETFs and why you might want some in your portfolio at our ETF Center. And check out these articles, too:

Longtime Fool contributor Selena Maranjian owns shares of Cemex. Both Embraer and Cemex are Motley Fool Stock Advisor picks. The Motley Fool has a full disclosure policy.


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