Dividends and Weak demand keeps US inflation subdued

For all those who watch the Federal Reserve and interest rates, the theory says if too many dollars are chasing after too few goods inflation will be caused and interest rates will have to be raised so fewer dollars are chasing after the goods. In an article by Lucia Mutikani of Reuters, the good news on inflation is US consumer prices fell for a 3rd straight month. The weak demand caused by the COVID response and recession has kept the Federal Reserve from even thinking about raising interest rates.

In mid June, the officials from the US central bank had a 2 day policy meeting and it is expected the Federal Reserve will maintain a very accommodative monetary policy for some time to come.

The Labour Department said the consumer price index dipped 0.1% in May after going down 0.8% in April which were the largest declines since December 2008. Since most states had a stay at home restrictions, gasoline prices fell 3.5%.

The National Bureau of Economic Research, the arbiter of US recessions, declared the economy was in recession in February.

Linking to dividend paying stocks, as long as inflation is lower the dividend on profitable companies looks very attractive and low risk. The objective is to ensure the investments you make are in profitable companies that can easily sustain dividends as you wait for the economy to come back to near normal. If interest rates go higher than dividends, it makes sense to diversify your holdings into fixed income, as long as dividends are higher, stay with profitable companies and the total return will be worth holding onto.

There are more questions than answers, till the next time – to raising questions.

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