Economic Indicators and Inflation

With the amount of money being injected into the economy these days it is extremely important to keep a close watch on inflation rates. The better educated you are on recognizing trends that lead to inflation the more likely you are to avoid a major pullback in the market. Inflation is simply when the money supply is greater than the supply of goods. Simple as that. But how do you recognize its an issue before the media does? Here are 5 key reports and statistics to follow on a monthly basis to understand where inflationary rates are headed as well as the all important interest rates.

1. The money supply: When more money than goods is in play, prices will ultimatley rise. The money supply can often indicate what the FED will do with interest rates. If the money supply is rising at too fast a pace, it is likely the FED will increase interests rate to combat the inflationary rate. Typically any increase in interest rates will send the market into a slump.

2. Consumer Price Index (CPI): This measures the cost of goods and services ranging from food to housing. A typical increase is expected to be between 1-2%, but anything greater is a sign of inflation. If prices are rising than the demand is greater than the supply, causing inflation. www.bls.gov/cpi/home.htm

3. Retail Sales Data: Tracks retail sales from all ranges of corporations. If this number is reported negative it represents a decrease in sales from the prior month indicating supply is going to slow down. Eventually supply will be so low that demand will overtake it, and prices will rise. This indicator is a good leading one for inflation. www.census.gov/marts/www/marts.html

4. Jobless Claims: A week labor market indicates poor sales, consumer confidence, and indicated where housing numbers will likely be. When jobs make the turn and start increasing, spending is increased and can often outpace the increase in supply, once again causing inflation in prices. 

5. Consumer Confidence: Cosumer confidence levels are a key way to recognize future potential in inflation and interest rates. If the confidence levels are trending upward, chances are spending is increasing, sales data is going to increase, and demand is rising. Once again, as demand rises and supply continues to be eaten up, prices will increase.

The fear or potential of inflation can often cause the FED to adjust interest rates. You can use the indicators as method of determining what the FED will do with interest rates at their next meeting. If inflation looks to be a concern in the near future, the FED may increase interest rates to reduce the amount of spending, which will impact the market in a negative fashion. We are a ways away from the return of massive spending, but make sure you keep a close on the month to month increases or decreases of each indicator.