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The Department of Agriculture releases the index of prices received by farmers at the end of the month for the current month. It reflects changes through the middle of the month. The index is not adjusted for seasonal variation. It includes crop prices and livestock & product prices. Analysts monitor farm prices in order to see early warnings of inflation or deflationary pressures in the economy. Why Investors Care
Farm prices are a leading indicator of food price changes in the producer and consumer price indices. There is not a one-to-one correlation, but general trends move in tandem.
Investors need to monitor inflation closely. An individual investor who understands the process of inflation and how inflation influences the markets will no doubt benefit over those investors that don't understand the consequences of inflation.
Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how data such as farm prices influence the markets - and your investments.
If someone borrows $100 dollars from you today and promises to repay it in one year with interest, how much interest should you charge? The answer depends largely on inflation, because you know that the $100 won't be able to buy the same amount of goods and services a year from now, as it does today. If you were in a country where prices doubled every couple of months, you might want to charge 400% interest for a total payoff of $500 at the end of the year. In the United States, farm prices tells us that food prices were falling through the summer of 2005. This represents only one sector of the economy though. At the same time, the CPI was rising 3 to 3.5 percent during this period. You might want to add in one or two percentage points to cover default risk and the opportunity cost, but inflation remains the key variable in what interest rate you would charge.
Inflation (along with default risk and opportunity cost) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates accordingly. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.
By tracking the trends in inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform.
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