January CPI: Does Inflation Really Matter Anymore?http://www.fool.com/investing/general/2014/02/20/january-cpi-does-inflation-really-matter-anymore.aspx Dan Caplinger
February 20, 2014
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
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
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