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Featured Advisor

Kim Butler

Partners for Prosperity, Inc.

City:Mt. Enterprise

State: TX

I have 20+ years of handling alternative investments in cash, growth and income for clients nationwide.  I strive to help my clients with all things financial in every way possible over the phone and the web.  I own an alpaca farm which I enjoy working during my downtime.  I also enjoy gardening, writing and reading books.  I also train other advisors on Prosperity Economics.

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Modest Growth vs. Fears of Inflation

Inflation is the monster lurking in the closet. You can make out the shadow, and the threat just won’t go away.

Fears of inflation have deflated consumer confidence, which fell in March, eroding gains made in February.

“The sharp decline in confidence was prompted by a sharp decline in expectations,” said Lynn Franco, director of The Conference Board Consumer Research Center, which produces the monthly Consumer Confidence Index. “Consumers inflation expectations rose significantly in March and their income expectations soured, a combination that will likely impact spending decisions.”

Volatile stock markets reflect investors’ worries that world events will continue to drive up commodity prices, and that the federal stimulus plan will eventually overheat the economy. Gold and silver continue to attract investors seeking security and a hedge against inflation.

In an attempt to calm fears of inflation, Ben Bernanke, chairman of the Federal Reserve, told Congress earlier this month that inflation will grow at a healthy 2 percent for the next two years. Weak job and housing markets will counteract inflationary trends, he said, describing increases in energy and food costs as temporary.

The most recent data from the U.S. Bureau of Labor Statistics support Bernanke’s predictions. The Consumer Price Index, a leading measure of inflation, rose 2.1 percent in the last 12 months.

The energy sector was the largest contributor to the CPI gains. Energy showed a 0.5 increase in February as gasoline prices continue to rise. The food component of the index also contributed with a sharp increase in the prices of fresh vegetables and meats. The “food at home” component of the index rose 0.8 percent in February, the largest increase since July 2008.

McDonald’s, FedEx, SaraLee and other household brands have announced price increases in response to rising food and fuel costs. Gas is upwards of $3.50 per gallon at the pump. The U.S. Department of Agriculture estimates grocery store prices for food will increase 3.5 percent to 4.5 percent in 2011 as world demand for food increases.

Inflation and taxes are eroding modest gains made in personal income, according to data released yesterday by the Commerce Department. While income rose 0.3 percent, real disposable income fell 0.1 percent. Spending rose slightly, but savings rates declined.

Fears of inflation are greatest among less wealthy investors, while the national debt is a greater concern to the wealthiest Americans, reports Spectrem Group in its latest study of affluent investors across wealth levels.

Two-thirds of the Mass Affluent listed inflation as a key concern, while inflation ranked a key concern with 61 percent of Millionaires and 59 percent of Ultra High Net Worth investors. (Spectrem defines wealth in terms of net worth, not including primary residence. The Mass Affluent investors have with a net worth of $100,000 to $1 million; Millionaires, $1 million to $5 million; and the UHNW, $5 million to $25 million.)

The more affluent investors expressed greater concern over the national debt with 82 percent of the UHNW identifying the federal deficit as a key concern. Seventy-six percent of Millionaires felt that way, compared to 71 percent of the Mass Affluent.

The National Inflation Association, an organization dedicated to preparing Americans for hyperinflation, points to numerous warning signs that the economy is headed for big trouble: Foreign central banks have slowed their purchases of U.S. treasuries, while the U.S. now buys 70 percent of all new U.S. treasury debt. The private sector has also stopped participating in treasury auctions, and the PIMCO Total Return Fund, once the single largest private sector owner of U.S. government bonds, sold all its holdings this month. China is moving away from the U.S. dollar as a reserve currency, while the U.S. deficit stands at $2.67 trillion.