Inflation – Real or Not?

Consumer Price Index (CPI) was announced recently and the data showed no change for the month of February and 2% for the year over year data. While this was pleasing to Wall Street it seemed a little odd to me. In fact it got me to thinking about how the last time I went to the gas station the price of regular unleaded gas was $3.25 per gallon. That same gallon of gas one year ago was $2.20 per gallon. That would equate to an increase of 47.7% according to my calculator. A 2% increase would be $2.24 per gallon? While I am not trying to question the government calculations or how they come up with these statistics, I am asking to live in the country they got the data from.

Inflation has impacted everyone at every level of their daily lives. When I was in high school and passed my test to receive my drivers license (1975) gasoline was $0.32 per gallon. Of course, when my oldest daughter got her drivers license it was $2.10 per gallon. This made me remember all the times my dad ranted about how cheap things were when he was a kid. I now find myself in the same boat with my children. Inflation is real and impacts us slowly over time or does it? The additional challenge is if you are retired; what you thought would be plenty of money to last you the rest of your life, isn’t? This is the real world. I hear more and more retirees say they can’t live on what they have. In other words, what they thought would be plenty of money, no longer is enough. This is a real problem and unfortunately one without many solutions.

So why am I bringing up this depressing topic? So you and I can think long and hard about what we need to do to avoid this situation. When I learned about inflation and all the ramifications of this disease in college it was always talked about in average rates of growth over long periods of time. In other words, it would be stated that for the last 30 years inflation has averaged 3% per year. What I have since realized is inflation doesn’t quite work that way in reality. What it does is creep up on you and then explodes over a short period of time. If we were to look at the 50’s and 60’s there was virtually no inflation. In fact in the 50’s we had disinflation. But, then along comes the period of 1973-78 and boom big inflation. This is similar to what is happening now. The 90’s were a low inflation period and so was the period 2000-2005, but then we hit this cycle and boom—big inflation. That would explain our present situation. The next big impact of inflation is happening right before our eyes. Property taxes have more than doubled in the last three years. Gasoline is up nearly 60%. Milk is up more than 100% and the list goes on. My point here is simple; we are all going through the next phase of sticker shock in this country. The challenge is how long will it take wages to catch up? They will catch up eventually making it easier to afford today’s lifestyle, but how long will it take. The challenge is the two don’t increase at the same rates during the same periods. This creates adjustment periods similar to what we are in now. The end result is we have to make adjustments by cutting back on spending. Wow – could that be a recession?

This leads me to the conclusion that it is not so much the recession that determines what consumers spend, but hyper periods of real inflation (real cost of goods) that leads to slower economic periods and less consumer spending during the adjustment phase. It is also interesting to note the two hardest hitting periods of these hyper inflationary periods both coincided with escalating energy costs. Maybe it isn’t a coincidence that the Fed takes energy and food cost out of the Consumer Price Index?

So as we look forward for ideas of how to best invest our money in order to have enough to last us a lifetime, we need to take this into consideration. In fact, we need to look at what is on the horizon now as we invest our money. It is important to look at energy prices. Are they leveling or receding in price? If not, then look for more of what we have been experiencing at the consumer level with the real cost of living moving higher and impacting the amount of discretionary income the consumer has to spend. We won’t be out of the woods until this happens. It took major tax cuts and capital incentives last time this happened to put the economy back on its feet. So far it doesn’t look like Washington is going to do any of that type of cutting in the near term. In actuality, we are going to let the last tax cuts expire in 2010 which means a tax increase to many taxpayers. This could exacerbate the situation further. It is all about the economy and we need to watch this closely looking forward in order get the most out of our investment portfolio versus blindly believing it will get better soon. It may not; so pay attention and watch for developments to give you insight into what is on the horizon economically for the U.S. markets. If you are one of the retired individuals I referred to earlier you may need to change your approach in order to attain the lifestyle you want. Stay tuned as this is getting interesting.

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