Don't let inflation get you down
- By Milt x_Zall
- Aug 11, 2000
During much of the 1990s, inflation has been out of sight and often out
of mind. Yet inflation may be making an appearance once again, striking
fear into the hearts of investors and that inflation watchdog, the Federal
We typically hear about inflation through the monthly publication of the
consumer price index (CPI). This is a measure taken by the U.S. Bureau of
Labor Statistics of the average change in prices paid by consumers for a
fixed market basket of goods and services. The basket includes food, housing,
clothes, transportation and medical care. The measure is taken monthly and
then annualized. The CPI also is used to adjust federal annuities under
the Federal Employees Retirement System and the Civil Service Retirement
Through May, the CPI had risen 3.1 percent during the previous 12 months.
For the first five months of 2000, the CPI climbed at a rate that projected
to the end of the year would be 3.6 percent. Although that's well below
the rough double-digit inflation of the 1970s, the CPI is nonetheless on
the rise by recent standards. From a 6.1 percent rate in 1990, it fell to
1.6 percent in 1998, before jumping to 2.7 in 1999. Feds and other consumers
have felt direct evidence of this rise in gas prices and, in some sectors
of the country, housing costs.
The impact of the CPI numbers is widespread. The Social Security Administration
uses it to adjust benefits payments to retirees, the private sector uses
it as a bargaining chip in wage negotiations, and the Federal Reserve uses
it as an indicator in deciding whether to raise or lower interest rates.
The Federal Reserve has raised interest rates several times this year partly
because of the rising CPI. Initially, the effect of higher interest rates
attributable to actions taken by the Fed is to raise mortgage and credit
card rates and thus further increasing the CPI. Eventually, the goal of
the Fed is to slow job growth and the rate of increase in the CPI.
The CPI numbers can be somewhat misleading to consumers. That's because
the CPI reflects what's happening to the cost of an average national basket
of goods and services for the urban consumer. On the other hand, your personal
rate of inflation may be quite different, depending on your personal basket
of goods and services and where you live. For example, tuition for college
has risen much faster than the CPI in recent years, hitting families hard
who are trying to put kids through school.
Another example is medical expenses, which tend to hit the elderly harder
than any other group. Housing costs have skyrocketed in some areas, pricing
some families out of the market. (For regional CPIs and examples of how
to estimate your personal inflation rate, go to the Bureau of Labor Statistics'
Web site for the CPI www.bls.gov/cpihome.htm.)
Inflation is not expected to return to its double-digit rate of the 1970s.
Globalization of the economy and efficiencies wrought by computers are expected
to help keep inflation down. Nonetheless, even a seemingly low inflation
rate can hit you pretty hard over time. It is a silent thief: It robs you
and you don't even know it. Stuff $1,000 under a mattress and at 3 percent
inflation, that $1,000 will buy only $744 worth of goods 10 years from now
and only $554 in goods in 20 years.
How do you keep your personal inflation in check? Here are a few tips:
* Plan for it. When calculating your retirement needs, for example, be sure
your savings and investing strategies consider inflation. Many financial
planners use a 3 percent to 4 percent annual rate.
* Try to cut back expenses in your higher inflation areas. This might be
easier to do with college tuition and housing costs (for example, go to
a less expensive school, buy a less expensive home), than for something
like medical expenses or groceries. Cutting back expenses is especially
critical for retirees who won't be able to compensate for inflation through
* Review your investments. A well-diversified portfolio should go a long
way toward helping you through inflationary times. You might want to look
at moving some of your Treasury securities into the new inflation-indexed
government bonds. Stick with shorter-term bonds or shorter-term bond mutual
funds to minimize fluctuations in principal. Rising interest rates usually
accompany rising inflation, and rising interest rates hurt long-term bonds
more than shorter-term bonds. Also, look at real estate investment trusts
(REITs) because real estate tends to hedge inflation well. And don't give
up on stocks. Stock markets don't like high inflation and high interest
rates, but stocks still are the best long-term hedge against inflation.
Many thanks to Dennis Filangeri, a certified financial planner based in
Metairie, La., and the Financial Planning Association for providing information
for this article.
Zall, Bureaucratus columnist and a retired federal employee, is a freelance
writer based in Silver Spring, Md. He specializes in taxes, investing, business
and government workplace issues. He is a certified internal auditor and
a registered investment adviser. He can be reached at [email protected]