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The Day-to-Day Pinch of Inflation Shows the Real Rate

January 24, 2013

I am really fed up with the paltry 1.7% increase in Social Security this year. How can that number be right when Medicare premiums were increased by almost three times as much? Sure, if Medicare premiums were the only thing going up, maybe that wouldn't be so bad. But it seems like inflation is picking up far quicker than the official, government-reported numbers.

I recently saw a photo of Congress with the caption, "Are you sure you want to move these 535 items to the recycle bin?" After looking at several surveys on Congressional approval ratings, I would say part of the problem is that too many are recycled. About 535 items should be dumped in the trash.

Unfortunately, that's not a realistic option. However, we can attack the sunny illusion and look at things as they really are.

I am going to ask our readers for help this week in determining the true inflation rate you're experiencing in daily life. The best way to find out what the real inflation number is ask our readers. Hopefully you will find it a bit fun, but it's really an important first step toward looking at reality and taking charge of your financial future. Please take a moment after you've finished reading to complete our anonymous, one-question survey.

What the Heck Is Inflation Anyway?

One of my adult children recently asked me to define the word "inflation." I went to my online dictionary, and here is what I found:

in•fla•tion [ in fláysh'n ]

Higher prices: an increase in the supply of currency or credit relative to the availability of goods and services, resulting in higher prices and a decrease in the purchasing power of money.

OK, but what does that really mean? Well, if you're working, hopefully your wages are keeping up with inflation so you're not becoming poorer with each passing day. If you're retired and no longer working, your overall portfolio must increase at a rate higher than the rate of inflation, or you are getting poorer each year.

Imagine that you'd stuffed $1 million under a large mattress at the beginning of the year. Now, imagine that you lose 10% of your purchasing power. At the end of the year, that million would buy $100,000 less than it would have the previous year.

The average American is having a tough time grasping just what is happening. Edward N. Wolff of New York University just released a study concluding that:

"The median net worth of American households has dropped to a 43-year low as the lower and middle classes appear poorer and less stable than they have been since 1969."

We reached a similar conclusion on the effects of inflation on Social Security recipients in our recent article, Paul Revere, the Fearmonger.

Hopefully both retirees and folks in the workforce are seeing their incomes go up. However, if inflation is rising at a faster rate, their buying power is going down. Increased income that creates the illusion of wealth can confuse a lot of us.

What Is the Real Inflation Rate?

OK, you've got the idea. So what is the true inflation rate and how does it affect you?

The answer is, of course, "that depends." Since the Federal Reserve was created in 1913, the value of the dollar – according to the Bureau of Labor Statistics (BLS) – has declined by 95%. If $1.00 would buy 20 loaves of bread then, it would buy one loaf today.

According to John Williams' Shadow Government Statistics, if you calculate inflation the way the government did in 1980, the current inflation rate is 10%. If you calculate it the way the government did in 1990, it's about 5.5%.

And finally, ask any Social Security recipient what their cost of living adjustment was for this year's check. It was 1.7% across the board.

So take your pick, anywhere between the current government-reported 1.7% and the Shadow Government Statistics' alternatives. Whatever the real number is, we know one thing for sure: Inflation is a way of life in America, and it erodes our true wealth. It is particularly devastating for seniors and savers who aren't receiving regular wage increases.

Why does the government continually manipulate the Consumer Price Index (CPI) numbers in its favor? Basically it is a hidden savings tax. It benefits borrowers by allowing them to pay back debts with much cheaper dollars. And who is the biggest borrower in the world? Why, the US government, of course.

If you'd like to read more about the government's incentives to manipulate the data in its favor, take another look at Paul Revere, the Fearmonger.

So how can baby boomers and retirees fight back? During the Carter administration we experienced high inflation, but CDs and top-quality bonds also provided large interest income, allowing retirees to protect their buying power. Those options are not available today.

Dennis Miller, "Restaurant Detective"

How much do we really need to earn after taxes to maintain our wealth? First, let's agree on the true rate of inflation, the true increase in the cost of living for Money Forever readers over the last year.

It's not an easy figure to pin down. For example, my favorite ice cream still costs the same, but the container is smaller. Sure, the grocery clerk adds the same amount to my bill, but my cost per spoonful has increased.

That's why I went back to our credit-card receipts to hunt down the facts. We frequent several local restaurants. (No, I do not get any compensation for mentioning them.) Let's start with our local Bob Evans. Our bills for the last quarter of 2011 and 2012 were within a dime of each other. But this turned out to be a another example of hidden inflation, just like my ice cream.

After my doctor and I had a "little talk," I decided to get serious about dieting. Now we only order the "over 55" specials – you know, the ones on the back page of the menu. Yes, they are cheaper, but there's also less food. The standard meatloaf dinner comes with two pieces of meatloaf; the senior special has only one. While we are spending the same amount, believe me, our portions are a lot smaller!

Our local Hooters restaurant offers peel-and-eat shrimp sold by the pound. How much has our average bill increased? The answer is: 25.59%. A large portion of that is probably from increased labor costs, but that doesn't really matter. I'm still paying more – a lot more!

In most of the restaurants we frequent, Diet Coke and iced tea have gone up a quarter or more, which is also a double-digit price increase. As a friend mentioned recently, "Inexpensive dinners are getting more expensive."

I asked Vedran Vuk, our senior research analyst, to compare a few grocery staples, showing how much their prices have increased since 2006. The graph below shows what you likely already know to be true.

We received quite a bit of feedback after publishing Paul Revere, the Fearmonger, but no one disagreed with the idea that our government is not telling the truth. Perhaps BLS, the acronym for the Bureau of Labor Statistics, should be shortened to "BS." There may be some debate as to what the true inflation figure is, but no one believed it was 1.7%

Time to Put In Your Two Cents

Enough already with the government's phony numbers! I'd like to hear from you – all of our readers in the retirement trenches. Then we can use that figure to better understand the investment challenges we face. Please take a moment to complete our anonymous, one-question survey, and check back next week for the results. There's also a place to leave comments or share your own inflation experiences. If you really have a lot on your mind, please drop me an email.

We have all worked hard for our money, making a lot of sacrifices as we built up our nest eggs. I dislike the idea of any government inflating its currency to avoid doing what we all have to do: not spend more than we make.

What really frustrates me is the sneakiness, trying to hide the truth from the very public that keeps them in power. This is not a Democrat/Republican issue; politicians on both sides of the aisle are guilty. Inflation is like carbon monoxide to seniors and savers. If the alarm doesn't go off in time, we'll be in real trouble.

We want to keep you informed and help you confront the investment challenges head-on. We can all make our nest eggs last and hopefully leave some for the next generation, but first we have to see the monster for what it is.

Stay tuned…

On the Lighter Side

I read an article last week on how retirement savings accounts are drawing the attention of the US Consumer Financial Protection Bureau. The article points out that Americans hold $19.4 trillion in retirement assets. The author wrote:

"The bureau's core concern is that many Americans, notably those from the retiring Baby Boom generation, may fall prey to financial scams, according to three people briefed on the CFPB's deliberations who asked not to be named because the matter is still under discussion."

When I read articles that suggest the government needs to protect us from scams, etc. by requiring we invest a portion of our retirement savings with the government itself, it really infuriates me. Isn't the government running its own scam by tweaking inflation statistics?

The government needs to keep their paws out of our retirement money.  They will get it soon enough through estate taxes.

This kind of thing drives me nuts!

----

Congratulations to the 49ers and the Ravens who are playing in the Super Bowl. How cool is it that two brothers are the head coaches of opposing teams in the biggest game of the year? Their father was also a successful football coach; I cannot imagine just how proud their entire family must be. Why do I suspect that both brothers are quite familiar with each other's trick plays?

And finally…

Many thanks to our dear friend Toots who keeps us supplied with cool things to lighten the mood. Here are some she titled "Punography."

What do you call a dinosaur with an extensive vocabulary? A thesaurus.

On a class trip to the Coca-Cola factory: I hope there's no pop quiz.

I wondered why the baseball was getting bigger. Then it hit me!

All the toilets in New York's police stations have been stolen. Police have nothing to go on.

And my favorite…

I used to think I was indecisive. Now I'm not so sure.

Until next week…

 
 

About the Author

Over the course of his career, Dennis Miller has consulted with many Fortune 500 companies, training hundreds of executives to effectively communicate the value of their company's products to their customers. Among his many multi-national clients are: GE, Mobil, Shell, Schlumberger, HP, IBM, Corning Glass, Eastman Kodak, AC Nielsen, and Johns-Manville.

An active international lecturer for 40 years, Dennis wrote several books on sales and sales management. He was a contributor to... read more