Dave Sather is a friend of mine and he sends out financial information to a group of people. I read this article from him this morning and thought I would share it with y’all. (after I asked him if it was ok of course!)
Ahead of the Memorial Day weekend, Carol and I stopped by HEB to pick up a few things. Although the basket was almost empty, the bill was triple digits. Evidently, while I wasn’t looking we picked up a package of solid gold hotdogs and diamond encrusted hamburgers.
Making matters worse, last week I put a new set of tires on my car. I actually needed to replace the tires nine months ago but the tightwad in me decided to squeeze a few more miles out of the old set. During that nine month period the replacement tires increased in price by 30%. So much for being a tightwad.
Although no one will ever send you a “bill” for inflation, it shows up in virtually everything we do.
If our experiences are somewhat normal, why is it that our government tells us that inflation is low—a mere 2%?
In analyzing this it helps to know that inflation can be calculated many ways. The government likes to quote the “core inflation” figure. Conveniently, this calculation excludes both food and energy with the explanation that these two categories are very volatile on a month to month basis.
While they are volatile one month to the next, all of our clients like to eat and put gas in their cars. As such, sooner or later you have to factor these items in.
Once you add in the things we all use on a daily basis a more accurate inflation rate is about 8% currently, according to Shadow Stats.
It is not too hard to believe this figure. In 2001 the average price for a barrel of oil was $23. Today the same barrel of oil sits around $100—a 15% annual increase. Furthermore, companies like McDonalds, Proctor & Gamble (Gillette razors, Duracell, Tide, Bounty) and Kimberly Clark (Kleenex, Huggies, Scott Towels) have all cited cost increases in their raw materials of 5% to 10%.
If inflation is so obvious, why does the government use such a flawed figure? Admitting that inflation is much higher would require an increase in cost of living adjustments for everyone living on Social Security or receiving a federal pension. It would also require a much higher interest rate paid on our national debt. Denying the obvious is a simple way to spend less as long as you can get away with it.
Since the 1920’s the rate of inflation has averaged a bit more than 3% per year. However, there have been decades when the rate eclipsed 6%.
From a planning and investment perspective, these things matter.
If we experience a mere 4% inflation over the next 25 years, the purchasing power of your cash will decrease by 56%. Worse yet, if we incur a 6% rate your purchasing power declines by 78%!
While we are young and working, hopefully pay raises and good cost controls can neutralize the impact of inflation. The people I worry about most are retirees. They get almost nothing on interest bearing accounts and are no longer bringing in a regular paycheck. Additionally, we are living longer in retirement.
Often, we see people who retire early do fine for the first 10 years. Unfortunately, beyond that point the impact of inflation really starts to hurt a portfolio’s purchasing power—at a time when it is too late to re-enter the workforce.
This should be a wakeup call to save more, spend less, work longer and to be more progressive when managing your investment portfolio.
Dave Sather, President
Certified Financial Planner
Sather Financial Group, Inc.
120 E. Constitution
Victoria, Texas 77901
aSacredRebel 