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Here's Why Inflation Is Low

You've probably seen references in the media to our low inflation levels. That should be a relief, right? After all, who wants steep inflation? Among other things, it will eat away at the value of your long-term savings and investments. But hold on a second -- when it comes to inflation, things are not always what they seem.

Inflation reflects an increase in the prices of things. Think now about your daily life, and whether you're being affected significantly by any rising prices. Think about your local gas station. Think about the tears you blink back as you fill your tank. Think about how a $1.50 increase in the price of a gallon of gas over the past few years, multiplied by 20 gallons of gas per week, means you're paying $1,560 more per year for gas than you used to. That's not chicken feed!

It also doesn't seem to reflect an absence of inflation. So what's going on? Well, let's define a few terms. For starters, there are lots of ways of defining and calculating inflation, and policymakers and economists can often choose the method that best suits their needs.

A common measure of inflation is the "core" inflation rate, which excludes food and energy. Got that? If the core inflation level isn't rising very quickly, that's probably because it's not factoring in gas prices. These categories are often excluded because they tend to be rather volatile, so the core rates reveal the slower-moving, underlying price changes. But let's face it -- we don't exactly exclude gas or food purchases from our budgets, and they generally aren't discretionary purchases for us. For many Americans, having to spend an extra $1,500 on gas is a big deal.

Companies are feeling the pinch, too. Transportation companies such as Southwest Airlines (NYSE: LUV  ) , Laidlaw (NYSE: LI  ) , and FedEx (NYSE: FDX  ) are obviously affected by higher energy prices. But they aren't alone. For instance, if families are feeling pinched by rising gas prices, they might decide not to travel to theme parks, hurting both park operators like Disney (NYSE: DIS  ) and hotel operators such as Marriott (NYSE: MAR  ) . Meanwhile, Wal-Mart (NYSE: WMT  ) draws a lot of lower-income shoppers, and if they find they have less money to spend, Wal-Mart's revenues may take a hit.

At Forbes.com, Vahan Janjigian noted that Wal-Mart is experiencing more shoplifting lately, too. And he pointed out another concern: inflation-adjusted incomes actually fell in May.

I can't sum it all up better than he did: "Those of you who are lucky enough not to have to drive or eat, well, it turns out you're doing pretty well!"

Some perspective
Though our friends at the Federal Reserve Board frequently look mainly at the core inflation numbers, there's some grumbling afoot that the broader Consumer Price Index (CPI) should be used instead. It includes food and energy, which make up a quarter of the CPI. Lest you think that the Fed is just being crazy, note that according to a Reuters report, "One reason the Fed may prefer to focus on core inflation is because its interest rate decisions have much more impact on prices of core goods and services [think of housing, for example, and mortgage rates] than on the prices of energy and food, which are traded globally."

Learn more
You can (and should) learn more about inflation and how to resist it in these articles:

Finally, we'd love to help you fight inflation in your retirement savings. I encourage you to take advantage of a free 30-day trial of our Rule Your Retirement newsletter service. It's prepared by Robert Brokamp, a smart and witty guy who distills what you really need to know into a manageable volume each month. A free trial will give you full access to all past issues, allowing you to gather valuable tips and even read how some folks have retired early and well. Robert regularly offers recommendations of promising stocks and mutual funds, too.

Longtime Fool contributor Selena Maranjian owns shares of Wal-Mart, and her parents took her to Epcot when she was in her 30s. She urges readers to pay attention to their cars' tire inflation. Wal-Mart is a Motley Fool Inside Value recommendation. Disney and FedEx are Stock Advisor picks. Try any one of our investing services free for 30 days. The Motley Fool is Fools writing for Fools.


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Selena Maranjian
TMFSelena

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter...

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