Tuesday, July 24, 2007

Core Inflation results in Overinflated Ideas

One of my pet peeves lately is the idea that the economy is doing so great because of the low inflation rate. Core Inflation is hovering around 2.2 percent and that is being heralded as great news with regard to the overall economy.

The problem, as I see it though, is that the inflation that I feel in my monthly/yearly budget continues to increase at an alarming rate. As a simple exercise, I've been tracking all of my expenses for the past year and a half. My household food expenses were averaging somewhere around 200 dollars per month about 1.5 years ago. However, now, the average is often closer to 325 per month. This means that there is a significant increase in the price of food. This is about a 35% increase.

Thankfully, food is not the big expense in my budget, but it is getting to be that way. If it continues to creep up at this level, by the end of 2008 I will have a monthly food budget of about 440 dollars per month.

Unfortunately, I have not been tracking gas expenses, but those too have been creeping up. And my monthly commuter pass went up by 50 dollars per month as well. That is a 600 dollar per year increase.

The reason that these reports really burn my toast is that 2.2% is no where near the amount of real increase in regards to overall inflation. Property taxes and services all continue to increase in price as well. In the end, household monthly expenses are increasing at a rate of about 5% each year. As debt continues to be paid off, this is a manageable number, but once debt is completely paid and money can no longer be "saved" by paying off debt and eliminating interest payments, these increases will become problematic.

Planning for Retirement
The idea that real, average-joe inflation is 2.2% is a bunch of hot air if you ask me. So I have no intention of using that figure. Instead I reworking my plans towards planning on 4 to 5% of real average-joe inflation because 2.2 or even 3% is dramatically under estimating it, in my opinion. And although it doesn't seem like that much, toward the end of a 20 year retirement, those 1 or 1.5% differences will make a big difference. I worry about people that think they can get away with a 2 or 3% increase. I think that is overly optimistic.


Brip Blap said...

Amen. I don't think the inflation rate adequately reflects some key price increases - housing, gas heat, gas for your car, etc. Even tomatoes went way up due to some problems with the California crops. Taking a broad measure of the costs doesn't really reflect what 'average Joe' has to pay. And forget about taxes. Here in Jersey I would do backflips if we capped tax increases out at 2.2% per year...

Kevin Gunn said...

I fear the change in the way we define "inflation" had more to do with capping Social Security increases (which are tied to inflation) than anything else.

I work for a state university. We just received a 4% cost of living adjustment (in many recent years we've received nothing). Unfortunately, my property taxes are up about 8%, health insurance deductibles went up 30%, premiums went up 11%. Groceries are climbing fast as well. My cost of living is going up WAY faster than the "core rate".

Heck, even my BARBER is going to raise his prices next month because his rent goes up 6% annually.

Like you, I expect to be OK due to rapidly declining debt levels (plus I've started a business on the side that is moving towards profitability). Still, the "official" numbers are not what my budget tracking reveals.