How do you construct an inflation-sensitive portfolio?
Whether you’re saving for retirement, education, a dream home or launching a business, you can't afford to lose ground to the erosive effects of inflation.
The first step is understanding how inflation is measured.
A variety of statistics and economic indicators help investors track and understand inflation. The acronyms have become part of our financial language. What does each acronym mean? Which ones matter?
Also known as “headline” CPI, this is the most widely used inflation index. It measures the overall change in prices for a representative basket of goods and services based on 80,000 prices collected monthly, including food and energy. You will hear this number quoted in business news each month on the morning it's released. CPI readings have been known to move financial markets.
Published by the Bureau of Labor Statistics (BLS), a division of the U.S. Department of Labor.
Excludes the volatile food and energy components of the CPI to provide a more stable inflation measure.
Also published by the BLS.
A version of CPI selected by the US Treasury to calculate the inflation adjustment for TIPS: non-seasonally adjusted U.S. City Average All Items Consumer Price Index for All Urban Consumers.
Also published by the BLS.
Measures changes in wholesale prices, reflecting cost pressures for manufacturers and producers.
Also published by the BLS.
Measures spending on goods and services in the U.S. The PCE captures changes in prices as well as consumer behavior. A preferred inflation measure for the Federal Reserve.
Published by the Bureau of Economic Analysis (BEA), a division of the U.S. Department of Commerce.
Measures the average change in the prices of all goods and services produced in the U.S. Includes exports but not imports. Used by some firms to adjust contract payments.
Also published by the BEA.
While each indicator offers important insights into where price levels are, the three most often cited are CPI, PPI and PCE.
Understanding inflation is a fine place to start; building a portfolio with inflation-sensitive investments is your next step. Fortunately, the universe of user-friendly, tax-efficient and low-cost ETFs offers a wide variety of choices for inflation-sensitive investors.
1. “Consumer Price Index Frequently Asked Questions” U.S. Bureau of Labor Statistics, retrieved August 3, 2023. https://www.bls.gov/cpi/questions-and-answers.htm
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