Planning a Long-Term Strategy? Keep Inflation In Your Sights

Anyone who has paid for gasoline, health care or college tuition lately knows that even if the overall rate of inflation is modest, there are areas where costs are rising more dramatically. Earning returns that exceed the cost of living is important for all investors, but it is especially critical for those who may depend on their portfolios as a source of income.

What Is Inflation?

Inflation is the increase in the price of any good or service. The most commonly referenced measure of that increase is the Consumer Price Index (CPI), which is based on a monthly survey by the U.S. Bureau of Labor Statistics. The CPI compares current and past prices of a sample "market basket" of goods from a variety of categories including housing, food and transportation.

Inflation has been a consistent fact of life for U.S. consumers. Between 1900 and 1970, inflation was moderate, averaging 2.5% annually. From 1970 to 1990, however, the average rate increased to around 6%, hitting a high of 13.3% in 1979.1 Recently, rates have been closer to the 2% to 4% range, averaging 3.2% in 2006.