Investors and consumers should pay attention to inflation in the economy since too high of inflation can be detrimental in various ways. For investors, inflation can hurt certain types of assets such as growth stocks and certain types of real estate. Consumers may be hurt by inflation due to rapidly increasing prices on goods and services that everyday people need to purchase regularly.
There are several different inflation measurements that you may want to keep an eye on. These measurements are price indices which track a specific set of goods and services that allow you to see trends in changes in prices throughout the economy. The three main indices utilized are the Consumer Price Index (CPI), the Wholesale Price Index (WPI) and the Producer Price Index (PPI).
Consumer Price Index (CPI)
The CPI focuses on the prices that consumers are specifically paying for goods and services. By tracking a specific set of consumer goods and services, such as transportation, healthcare and food, the index gives you a broad view of how inflationary forces are impacting consumers. It is one of the main measures economists will look at to evaluate inflationary trends.
By taking the weighted average of the specific basket of goods and then tracking the changes in these prices, the CPI illustrates in a statistical manner the changes in cost of living for the consumer. Also, it should be noted that the CPI uses the prices at the retail level in the calculation of the index.
Wholesale Price Index (WPI)
In contrast with the CPI, the WPI does not measure prices at the retail level but instead looks at prices of goods before reaching the retail level. Mostly the WPI looks at prices of goods at the producer and wholesale level. However, this can vary for each country since each country measures WPI in marginally different ways.
Producer Price Index (PPI)
As an alternative to the WPI, many countries, including the U.S., use the PPI which is similar in the objective of measuring inflation based on mostly prices paid by wholesalers and producers. A group of indices are weighted and averaged in order to calculate the PPI. Essentially, just like with the WPI, the PPI focuses on prices of inputs paid by the sellers of goods as opposed to the point of view of the ultimate buyer of goods and services, the consumer.
What can you do about inflation?
Of course an individual consumer or a single investor does not have the power to affect the inflationary trends in the economy. However, there are some actions and decisions that you could take that would help mitigate the negative effects of inflation. For example, as a consumer, you can create a thorough budget to follow to ensure you are using your resources as efficiently as possible. Investors can deal with inflation by hedging or reorienting their portfolios towards more inflation-resistant assets. However, you may want to consult with a knowledgeable financial advisor about budgeting and regarding investment decisions.