UNCERTAINTY OF INFLATION
How Strong Will Your Dollar Be?
By Abner, Herrman & Brock Asset Management


The Federal Reserve has been diligent in its efforts to slow the U. S. economy from the high rates of growth it has experienced over the past two years. These efforts are primarily focused on the concern that high rates of economic growth in the U.S. will create higher rates of inflation. As we know, inflation increases the cost of goods and services as consumers and businesses pay higher prices for purchases. Higher inflation rates often lead to a weaker dollar in world markets which has further destabilizing affects on the U.S. economy.

• The Federal Funds rate has been steadily increased with minimal impact on U.S. economic growth.
• Economic growth in the second quarter of 2006 has slowed significantly from the robust 5.6% growth of the first quarter of 2006.
• The slow down was expected as first quarter of 2006 growth included a catch up from the negative effects from Hurricane Katrina.

Numerous factors have come together to provide a healthy economy not only for the United States but also for most other major economies throughout the world. Of course with higher global economic growth we would expect an increase in the rate of inflation. Inflation in and of itself is not bad. Inflation is required to provide business with pricing power to offset higher operating costs. The question is what rate of inflation is acceptable to achieve sustainable real economic growth.

It is for this reason that there is a wide diversion of economic forecasts for interest rates and inflation. If history is a guide to the future, experience has shown us that forecasts for economies and interest rates typically “overshoot their mark.” We would expect a similar experience this time. These uncertainties are likely to carry over to the stock market. By comparison, bonds may emerge as an attractive alternative or complement.

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Abner, Herrman & Brock Asset Management has provided personalized investment solutions for high net worth families nationwide since 1981.