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Answer:
Dear
Allen,
It's
true -- we are seeing signs of inflation creeping
back into our lives. However, it's hanging in the
wings rather than taking center stage. Nevertheless,
you're right to be aware of its potential impact upon
your equity portfolio and your cash nest egg.
Here
are the most recent figures -- all for September.
(1)
Energy prices rose by 12%, the biggest jump in 48
years.
(2)
Core prices, however, rose by only 0.3%. (The
core price figure excludes food and energy.)
(3)
The manufacturing index rose by 17.3%, up from 2.2%
in the prior month. This is the largest increase in
about three years.
(4)
While the prices manufacturers paid for materials
rose, at the same time the prices manufacturers received
for those same products jumped. That means many manufacturers
are passing on the costs to you and me.
(5)
According to InflationData.com,
the overall inflation rate for the month was 4.6%.
The
Energy Supply Bottleneck
Economists
and analysts are pretty much in agreement that the
increased inflation rate is largely caused by an energy
"supply bottleneck". This bottleneck clearly came
about after much of the United State's refinery capacity
was halted due to the damage done by hurricanes Katrina
and Rita in the coastal states.
Your
Portfolio
Rising
Interest Rates. If the Federal Reserve Board raises
interest rates at its next meeting -- there seems
to be about a 50/50 chance that they will -- you can
reap some benefits. Shortly after a raise by the Fed,
rates on savings accounts and bank certificates of
deposit also go up slightly. So will the yields on
money market accounts. If you have set it up, at BUYandHOLD,
all your money not invested in stocks is automatically
swept into our money market fund where it earns interest
at the going rate. Click
here to learn more about this feature.
And
newly issued corporate and municipal bonds will be
forced to offer higher rates in order to remain competitive.
While
some stocks in some industries obviously take a beating
during an inflationary cycle, many do not. Aspirin,
toothpaste, soap and medicines continue to be in huge
demand, regardless of the state of the economy. And
we have to eat.
Therefore,
stocks in well-run drug and pharmaceutical companies
as well as those in the food and beverage industries
are somewhat inflation proof. Many public utilities
and health care companies would also hold their own.
Caution:
Avoid companies with a significant amount of debt.
Based
on these facts, review your portfolio carefully and
if you have further questions, write to us again.
Meanwhile,
for current information and statistics, go to: www.inflationdata.com.
And, to determine the impact inflation has on a given
dollar amount over a specific time period, use the
calculator at: www.westegg.com/inflation.
Good
luck!
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