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Answer:
Dear
BuyandHolder,
Here
are the pertinent facts about inflation -- based on
figures just in for 2005. They do not reflect the
first three weeks of 2006.
1)
Inflation in 2005 was at the highest point in five
years.
2)
The Consumer Price Index rose 3.4% in 2005, up from
a 3.3% increase in 2004.
3)
The average employee's earnings (on an hourly
basis) went up 2.8% in 2005. That indicates that income,
for many workers, did not keep pace with inflation.
Where
Prices Rose
Although
inflation last year was up, it was definitely not
up across the board. Therefore, it's important to
look at where the big increases were.
Energy
prices were the number one leader, going up 17.1%.
That's the biggest increase since 1990. The energy
rise accounts for 40% of the overall rise in prices
last year.
Within
the energy category: gasoline prices were up
16.1%; natural gas prices jumped by 30.2%;
home heating oil was up 27.2%.
A
second area where inflation had a noticeable impact
-- medical care. Costs here rose 4.3%. That's
the biggest increase in three years.
Housing
prices rose 4% last year. That's up from 3% in
2004.
Finally,
education costs were up 2.4%, the highest for
that category in four years.
Impact
on Interest Rates
As
you probably know, the Federal Reserve Board has been
raising interest rates since the middle of 2004 in
an effort to contain inflation. The Board's Federal
Open Market Committee meets again on January 31. Fed
watchers are predicting that the Fed will raise the
cost of borrowing at that time -- but that this may
be the final raise for some time.
In
fact, the President of the Richmond Federal Reserve
went on record saying that the Fed would probably
make one more rate hike before ending its 18-month
inflation tightening policy.
Stocks
During
the first weeks of this year, the market has been
quite strong, with the Dow Jones Industrial Average
crossing the 11,000 mark for the first time in over
four years.
Stocks
were further bolstered when the president of the New
York Federal Reserve, Timothy Geither, said in an
early January speech that while overall inflation
pressures rose in 2005, "inflation excluding food
and energy ... has been quite moderate, in part due
to a very modest growth in unit labor costs."
It's
the beginning of the new year, a good time to review
all your financial holdings. I would not recommend
selling stocks based on the fact that energy costs
were up last year. You should sell only those stocks
that you consider true losers at this point...and
I hope you have very few of those.
Good
luck!
Sources:
Los
Angeles Times
USA Today
Washington Post
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