Inflation has ravaged economies like Zimbabwe, but U.S. investors shouldn't worry. Image: Wikimedia Commons.
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The stock market has stayed near its record high in recent months, and one factor that has helped stock investors the most are the low interest rates the Federal Reserve has held in place for years. By enabling businesses to borrow cheaply, the Fed's low-rate policy has boosted corporate profits and helped many companies grow more quickly than they otherwise would have. Ordinarily, low rates for a sustained period of time would have stoked inflation, yet inflationary pressure throughout the U.S. economy has remained nearly nonexistent throughout the the economic recovery since 2008 and 2009.
In the coming months, though, you can expect fears of inflation to rear up again. Fortunately, there's a very good reason to largely ignore those fears: they'll largely be due to a single anomalous factor that is on the whole still quite favorable for Americans.
The oil bounce and its impact on inflation
The plunge in oil prices has had a huge downward impact on inflation over the past year. Between last July and January, inflation figures fell in six out of seven months without accounting for seasonal adjustments, with the single upward movement being less than 0.1%. Year over year, the Consumer Price Index actually fell between January 2014 and January 2015. Falling energy prices led to reduced expenditures on gasoline and other fuel and spurred some businesses to pass on their cost savings in the form of lower prices for goods and services.
More recently, though, oil prices have hit bottom and started to rise. Earlier this week, West Texas Intermediate moved above the $60 per barrel mark for the first time since last fall, and the average price of gasoline in the U.S. has risen for 20 consecutive days. In just the past month, gasoline has jumped about a quarter per gallon, undoing some of the benefit that plunging prices previously gave to consumers.
Inevitably, rising gas prices will work their way into inflation figures, and so you can expect monthly CPI announcements to raise panic. Yet it's important to put the recent reversal in gasoline prices into perspective. Even with the gains, gasoline remains more than a $1 per gallon cheaper than it was this time last year. Price-tracker AAA has cited seasonal factors such as switching to summer gasoline grades and unexpected refinery problems as squeezing supply more than usual, which could eventually lead to an easing in prices.
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The key takeaway for investors is that headlines over the next couple weeks are likely to emphasize the potential return of inflation to the economy and the likelihood that the Fed could tighten its monetary policy sooner than expected in order to fight it. Yet because of the unusual nature of what is causing this largely illusory inflationary trend, most policymakers aren't likely to pay much attention -- and you definitely shouldn't panic about any major impact to your portfolio.
The article Why You Should Ignore the Coming Inflation Panic originally appeared on Fool.com.
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