Structural Inflation

Maximize your investments by taking structural inflation into consideration

Structural inflation is a type of inflation caused by the federal government's monetary policy, instead of the market-based fluctuations of supply and demand. In fact, structural inflation is one of the government's strongest weapons against economic slowdowns and recessions. It can, however, have severe impacts on investors and businesses who rely on the central interest rate and credit markets to make their money.

The best way to make use of structural inflation while investing is to carefully monitor its movement and adjust your investment strategies accordingly. Certain financial instruments fare better than others during times of inflation, and picking them is relatively easy, as long as you know these basic facts:

1. The Consumer Price Index is a good indicator of inflation.

2. Several times a year the Federal Open Market Committee meets to set interest rates and control structural inflation.

3. The rate of return on investments like stocks and bonds is greatly affected by structural inflation.

Watch the Consumer Price Index for changes in structural inflation

The Consumer Price Index (CPI) is an aggregate measure of the price of food, medical services, transportation and other consumer goods and services. Generally speaking, inflation raises the CPI, while deflation lowers it. Watching the CPI is the easiest way for small businesses and individual investors to evaluate the open market and its future growth.
Bureau of Labor Statistics. You can also find valuable information on inflation from the Producer Price Index, which measures the prices at which goods and services are sold, not bought. You might also find the historical information about the CPI useful at InflationData.com offered by Financial Trend Forecaster.

Pay attention to the Federal Reserve, which sets interest rates and controls inflation

The Federal Reserve is the closest thing to a structural inflation expert as the country has. Although it doesn't offer private structural inflation consulting, it does provide business owners, investors and consumers with a wealth of structural inflation information and data pertinent to the health of the economy.
Federal Open Market Committee (FOMC) maintains an extensive database of its policy decisions and reports to Congress that explain and specify the interest rate, among other things. To observe trends in structural inflation, check the history of interest rates at the Federal Reserve Board website. Learn more about what the FOMC does and how interest rates affects consumers at Investopedia.

Be wary of structural inflation when investing in bonds and treasury bills

In general, fixed-income investments like bonds and T-bills are affected the most by structural inflation. If the Feds lower interest rates, the economy will grow, causing inflation. Unfortunately, a hike in structural inflation means your investments will have to earn more to keep their base value. This is somewhat confusing, since inflation is generally a sign of positive economic growth, but it's vital for investors to remember.
TreasuryDirect from the Bureau of the Public Debt and monitor its available interest rates. If you're unwilling to risk a drop in your returns because of inflation, consider investing in Treasury Inflation-Protected Securities. These are similar to Treasury bonds, notes and bills, but they account for inflation. To learn more about bond investing in general, visit InvestinginBonds.com from the Securities Industry and Financial Markets Association.
  • Your bank can be a good source of structural inflation advice. While not an official consultant for structural inflation, a bank executive can help you make wise decisions about your business' investing and borrowing strategies.