CPI – Real Number or Pie in The Sky?

No doubt you have heard repeatedly about the CPI.  No, this isn’t a professional designation!  CPI stands for the Consumer Price Index. The CPI, a common measure of inflation, is discussed monthly with the various reports that come out from the government.  What does the CPI mean to you?  Is it a real number?  How should you interpret it?

Current Government CPI figures are 1.41% through July 2012.  What you may not know is that this number does not include energy costs or food.  These are certainly two important items in daily life. I sure can’t do without food and walking everywhere isn’t an option where I live.  The food index has risen 2.3% over the last 12 months according to the Department of Labor.  I came back from vacation about a month ago.  At that time, regular gas in my town was $3.03/gallon.  Today I filled up at $3.59.  That’s an increase of 18.5% in a month.  Annualized that would equal 222%.  Wow!  Maybe we will see $5.00/gallon sooner rather than later.  I have a client who says that as the gas prices go, so goes the economy.  He may have a point! 

Let’s discuss food.  Do you have kids returning to school?  I noticed brand name zip lock sandwich bags are about $0.20 more expensive than this time last year.  Jelly is more, as are bread and cookies.  Generic or store brands are demanding a closer look!  What food or commonly used items have you noticed that have increased in price?  Your dollars aren’t buying as much now as this time last year.

What does inflation mean to you in dollars?  Purchasing power must be equated with inflation.  Certainly the government’s figure of 1.4% is less offensive than the real inflation rate I’m seeing in the goods and services I buy.  What’s your experience?  Can you share any examples?  I venture we all agree that this low rate of inflation and low interest rates will not be able to continue given the amount of government debt on the books.  If you are a baby boomer, then you remember 14% mortgage rates, 70% tax brackets and 18% earnings on your money market savings.  No, not fiction; this was in the early 1980’s!!  Higher inflation and higher taxes are coming.

If you need $5000/month to support yourself now at a 5% compound annual inflation rate you will need $5512.50 in two years. In 10 years, you would need $8144.47!  In 20 years, you would need $13,266.49. Has your income kept up with that rate of inflation?  That may not seem a big jump but inflation is insidious and creeps up on us.  As certified financial planners we always figure in inflation also known as cost of living when projecting future income needs.  To plan for the future whether you are planning five years or 20 years hence, you must factor in inflation. 

I remember penny candy, nickel cokes, and $0.15 hamburgers.  Those same items now cost more.  Much More!  A coke is up to $2.00 in a vending machine.  Sometimes you can buy one for about a dollar at the gas station including a cup and ice.  Hamburgers?  The basic burger is on the dollar menu at McDonalds.  But a burger at Red Robin will set you back about $9.00!  My first house cost $46,000 in 1978.  That same size home would now cost at least $180,000 after the real estate decline.  How about a new car?  My first car, a Pinto was about $3500 in 1974 and gas was about $0.55/gallon.  My last vehicle, a Nissan Murano was over $35,000 6 years ago.  Gee!

What are you earning on your savings account?  Currently the return is only about 2/10 of 1%.  I hear some people state, “at least I’m not losing money”.  While the dollars may stay constant, the purchasing power isn’t.   Taxes must be figured in.  If we just use the government’s CPI of X and figure a minimal 22% combined federal and state bracket you are in the hole!  The more money you make, the likelihood is you will be further in the hole due to taxes.  Yes, you are losing money, slowly and surely – and guaranteed. 

You do have alternatives.  What are your alternatives?  To assess your situation seek a certified financial planner who can give you an objective overview and opinion.  You must plan and save for retirement.  In estimating retirement costs the usual and customary figure to shoot for was 75% of your current income, adjusted for inflation.  Now, given the high inflation in health care expenses and the desire to maintain an equal standard of living we plan on at least 85%. 

Is your money staying ahead of both taxes and inflation?  Have you paid attention to where you are investing your 401-k?   Are you prepared if a job layoff occurs in your family?

Planning.  It’s what we do.  Call us if you’d like to chat about your situation.

About Sara Seasholtz

Sara Seasholtz, CFP®, was voted one of "50 Most Influential Women in Charlotte" by The Mecklenburg Times in 2011, and she's been a trusted financial advisor to her clients for over 30 years. Have a financial question?ASK SARA!

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