Posts Tagged ‘Cost of Living Increase’
Less Bang For Your Buck
Wednesday, January 16th, 2008
Less Bang For Your Buck
I was driving to the gym the other day when I realized I was low on gas, so I pulled into the closest gas station which happened to be Chevron. After filling my tank I looked up at the screen noticing I had just paid $52.68 for just a little over 16 gallons ($3.29 a gallon for premium grade). Then it hit me. If gas prices are reaching record highs and affecting our buying power then what other consumer goods are having the same affect on our economy?
We are all well aware of the rising gas prices in our world today, but when was the last time you noticed the price of your grocery bill? According to July’s report from the Department of Agriculture, the price of food is on a rise with dairy products out front hitting an all time high. Milk is selling for an average price of $3.80 a gallon up 51 cents since February due to the shortages in Australia and Europe and the increased use of corn for biodiesel production.
This has driven up the price of cattle feed which is added to the cost of milk according to the USDA analyst Ephraim Leibtag. Gas prices are also soaring according to the latest figures from the November economic reports with petrol prices jumping 34.8% a record high since the 1990 Gulf War. Even childcare has become unaffordable for the middle to lower class families forcing them to choose jobs that offer subsidized child care. Average child care fees for one infant range from $3,803 to $13,480 a year, according to the National Association of Child Care Resource and Referral Agencies. To put it into perspective that is an average of 10.6% of a two family income to provide care for one child.
About a week ago, the US Dollar was weakening, trading at .6837 to the Euro and .4904 to the U.K. £. As you can see, as a foreign investor our market looks very inviting because they can buy more for their currency as opposed to buying in their own companies. In turn it will cost us more to invest into international companies as well resulting in making it harder for us to compete and diversify our portfolios. However, one statistic that slightly skews the buying power of the dollar is credit card debt among Americans.
If we take a look at some of the most recent figures that came out we can see a trend of a continuous increase in the inflation rate. According to the Federal Reserve the recent elevated energy and commodity prices, among other factors, may put upward pressure on inflation. This is reflected in the Producer Price Index (PPI). The PPI measures inflation pressure before reaching the consumer hitting a three decade high in November of 3.2%. Indicating even more pressure placed on the dollar weakening it even further.
Finally, let’s take a look at how this all fits together and truly affects our every day lives. Consumers are paying more for gas, milk and an abundance of other goods and services, therefore reducing the amount of consumer spending on other items mainly for the middle to lower class. Even with the Fed’s most recent interest rate cuts of 25 basis points, we may still see a weakening economy going into next year.
This affects the everyday investor who is trying to make a buck on the ups and downs of the market. Because now not only do they have to build a portfolio that is diversified enough to hedge against the swings in the market but now they must also incorporate a plan that will minimize their inflation risk. Additionally, foreign investors can purchase American companies’ at discounted rates due to the upward pressure of inflation, which drives the value of the dollar down even further.
Our economy seems to be entering a downward turn and this is weakening the dollar. It is also causing the consumer’s bankroll to be spread thinner and thinner and is forcing middle to lower class families to make major changes to their lifestyle in order to compensate. The overall opinion of investors seems to be the same across the board. The Fed needs to cut interest rates lower during the next Federal Reserve meeting. This will help boost American companies and investor confidence in the stock market and the outlook of our economy.
