FINANCIAL ADVICE by CHRISTOPHER LYNCH

INFLATION vs DEFLATION

Inflation is the increase in price of goods and service over time. When investing and planning for your financial future, it is important to realize that leaving your money under the mattress only leads to a reduction in true value of your money. Planning professionals let clients know and understand inflation and deflation and how it can help with planning to effectively

maximize investment earnings over the long term. A powerful example when trying to understand inflation is looking at prices in 1980 vs 2009 in common goods. In 1980, a gallon of milk was $0.87 and now it's $2.99; a stamp was $0.15 and now it's $0.44; and so on. With this constant increase in the cost of goods the purchasing power of your money constantly decreases. A low, steady rate of inflation is a sign of an economy with positive growth. Low inflation can help dilute the risk of a recession by helping the workforce to maintain spending and cost of living.

In the U.S. inflation is measured using the Consumer Price Indexes (CPI), a typical group of consumer goods and services are measured on a monthly basis to see whether products are going up or down in value (deflation). The US government provides CPI data on its official Bureau of Labor Statistics site. The issue with measuring the CPI is objectively monitoring the change in prices and making sure that the price change isn't related to changes in other factors such as volume,quality,or performance. For example if there is a corn shortage due to weather, that should not be a factor in the CPI. However, if the price of corn simply changes without any outside factors then that is directly related to inflation.

The opposite of inflation is deflation,which means the value of money has increased while the value of goods has decreased. Although on an individual level deflation seems likes a good thing - with the value of your money decreasing at a slower rate--for the economy as a whole it can result in a slowdown in the economy with the worst example being the Great Depression. Understanding the principles of inflation and deflation can help in your investment planning and the value of your money over time changes. Be sure to discuss the properties of inflation and deflation with your financial advisor so that you understand clearly the present and future value of your money.