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Answer:
Dear
BuyandHolder,
It
appears so, but only slightly. Consumer prices rose
just 1.9% for all of 2003. Then, in the first six
months of 2004, they increased at an annual rate of
4.8%.
What
causes inflation?
During
the past few years, we had a sluggish economy and
many people lost their jobs. These two factors lead
to a decrease in demand for thousands of products
and services -- especially those we don't absolutely
need.
However,
now that the economy is reviving somewhat, demand
is reviving somewhat. And this increase in demand
leads to rising prices. For example, if more and more
people want to buy a new car, then automobile makers
can charge higher prices without driving away customers.
When increased demand is fairly widespread and fairly
persistent we have inflation.
Inflation
in this country
Inflation
averaged about 2.4% in the 10 years ending 2003 --
a very manageable rate. Nevertheless, it averaged
8.7% in the 10 years ending in 1981 and in the year
1979 alone, it was 13.3%. However, over the past 50
years, inflation has averaged 3.97%.
Role
of the Federal Reserve
Recently,
the Fed has moved to fight serious inflation by raising
short-term interest rates. When rates are higher,
it makes it more expensive for individuals and businesses
to borrow money. If these two groups borrow less,
the demand for things, such as homes and cars, slows
down. The point being that as demand is reduced, so
is inflation.
Future
growth
Experts
believe the economy will grow in 2005, but at a slower
pace than in the late 1990s. They are predicting that
the Fed may raise rates from the current 2% to 3.25%
by the end of next year. But keep in mind, these are
predictions, not facts.
Due
to the relatively low cost of borrowing at the present
time, it's quite possible that U.S. firms will increase
their spending. Low interest rates should also keep
the housing market healthy.
Inflation
and stocks
According
to a study done by the Center for Research at the
University of Chicago, in general, stocks generally
outpace inflation. Here's how stocks, bonds and cash
have performed, compared with the average rate of
inflation, over the past 50 years:
Stocks
11.87%
Bonds
6.31%
Cash
5.22%
Inflation
3.97%
Bottom
Line: These figures suggest that you should continue
to buy and hold stocks of financially solid, well
run companies who are leaders in their industry.
For
a discussion of the important role industries play
in the stock selection process, click HERE
to read a previous column on the topic.
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