There are many reasons to follow inflation measures aside from simply staying ahead of price hikes on big ticket items like appliances and automobiles, which by itself can save you thousands of dollars over years of planning. Really high inflation is bad for more than just your monthly budget. It’s also very bad for many stock investments as it puts pressure on corporate profits and decreases real dividend yields. And while high inflation is a very bad thing, a big drop in inflation can be the first sign that things are going bad economically. A sign of an exceptionally big economic downturn is when the inflation indicators start to show the opposite effect, dropping prices or “deflation.”
If you’re interested in getting ahead of the curve in spotting inflation, the best bet is to go to the source. The fundamental source of most inflation is simple - more money chasing the same number of goods or, as economists put it, an increase in the money supply. Fortunately, the Federal Reserve releases reports on the money supply every Thursday. Moderate inflation is usually considered about 2%. When you see money supply growing faster than the growth rate of the economy plus about 2%, you can expect higher than moderate inflation.
The second advance forecast of rising retail prices is the wholesale price level and once a month the Bureau of Labor Statistics reports on that with the Producer Price Index series. The Producer Price Index, or PPI, is actually a series of indexes or statistics for finished goods, those ready to be sold; intermediate goods, such as parts that still need assembled into finished products; and crude goods, which are basically commodities that haven’t had much processing beyond being dug out of the ground or harvested from the field.
Another advance figure is the monthly Import and Export Price Indexes from the Bureau of Labor Statistics. Because the earliest stages of inflation can affect the foreign currency markets, inflation often shows up quicker in imports than on the local car lot.
Ultimately the number you’ll be most intersted in is the Consumer Price Index or CPI, the main measure of price inflation at the retail level. Like the PPI, the CPI is actually a series of indexes that measure prices based on different baskets of goods. The most important number for investment purposes is the core CPI-U, a number based on urban prices for goods excluding food and energy. For personal purposes you may want to consider the full CPI-U, including food and energy, but remember that these numbers are very volatile from month to month, so you should do any planning based on long term trends, not a one time spike (or drop) in prices.
To keep completely up to date on inflation, you’ll want to follow the Federal Reserve’s Money Supply figures weekly and the various economic indicators released by the Bureau of Labor Statistics, which also releases the monthly jobs report, another very important number for both investors and workers.
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