DEFINITION OF INFLATION:
Inflation is the loss of a constant purchasing value of the dollar,caused by an increase out of 'thin air' of the supply of money and debt creation by the financial system
(More technically, as the rate of growth in the money supply increases faster than the rate of growth in the GDP, then you have inflation)
FROM 1800 - 1929 the RATE OF INFLATION WAS ZERO - yep, 0 %
(because there was little debt and no way to "make money" (gold standard)...)
The average annual inflation rate for the ten years (1973–1982) was 8.73 percent compared with 3.96 percent in the next ten years (1983-1992), and 2.62 percent in the ten years from 1993-2002. Overall, annual inflation averaged 4.93 percent during the 30 years from 1973–2002 and only 3.2% since 1929.
TAXES ARE NOT INCLUDED IN THE Consumer Price Index (C.P.I.) (but as real estate, personal property, sales taxes, etc. go up it affects our personal rate). OH, and now the government and media like to talk about the "core inflation rate" which even excludes oil prices and food. Give me a break please.
AND:
Inflation in some of our adult years (late '40's to present) increased average prices significantly:
Example 1: a postage stamp in the 1950s cost 3 cents; today's cost is 37 cents - 1.45%/year
Example 2: a gallon of full-service gasoline cost 18 cents before; in June 2005 it was $2.28 (then over the $3 mark and now back to a little more reasonable amount) for self-service - 4.7%/year...(at the old June 2005 rate)
Example 3: a new house in 1959 averaged $14,900; today it's $282,300 (recent "bubble" is pushing this up, too) - 6.6%/year (more about this later in the e-mail though)
Example 4: a dental crown used to cost $40; today it's $740 - 5.4%/year
Example 5: an ice cream cone used to cost 5 cents; today its $2.50 - 7.3%/year
Example 6: monthly Medicare insurance premiums paid by seniors was $5.30 in 1970; In 2006 it is $88.50 - more than 8%/year (college tuition costs have been running about this rate of increase, too)
HERE'S HOW MUCH THE GOVERNMENT HAS BEEN PAYING ON THE INTEREST ON THE DEBT (never even coming close to ever paying off the principal amount of $7.8 trillion):
Available Historical DataFISCAL Year End
2004 - $321,566,323,971.29
2003 - $318,148,529,151.51
2002 - $332,536,958,599.42
2001 - $359,507,635,242.41
2000 - $361,997,734,302.36
1999 - $353,511,471,722.87
1998 - $363,823,722,920.26
1997 - $355,795,834,214.66
1996 - $343,955,076,695.15
1995 - $332,413,555,030.62
1994 - $296,277,764,246.26
1993 - $292,502,219,484.25
1992 - $292,361,073,070.74
1991 - $286,021,921,181.04
1990 - $264,852,544,615.90
1989 - $240,863,231,535.71
1988 - $214,145,028,847.73
Over this 16 year period, the interest expense of the U.S. government has increased at an average rate of 2.57% per year - that is not too unreasonable, but someday there will have to be a reckoning and an end to this.
FEDERAL DEBT of $7.8 trillion (2005) is 65% of the total U.S. economy of $12.0 trillion (2005 GDP) (32.5% in 1981 to 90% in 1950). So, there have been periods when the amount as a percentage has been higher. (As a side note, Japan which has been in the economic doldrums for more than a decade has a government debt equal to 160% of its GDP). But...
PRESENT VALUE OF SOCIAL SECURITY BENEFITS is $3.7 trillion today (2005) and there is a surplus (now being used for general government spending) but it will be $10.4 trillion over 75 yrs - which then may exceed the GDP (even though it continues to grow too) with the other debt outstanding. Medicare - let's not even go there but as a side note, the 1.45% tax for this which is matched by your employer is now based on ALL of your income without limit and still it is not enough.
THE BUDGET "DEFICIT" is the amount each year that is over-spent. $427 billion for 2005 (although this amount is being adjusted daily, weekly and monthly up and down from a range of $300 - $450 billion) or 3.6% of GDP (ranges from 3 - 6% of GDP). I would like you to note that 75% of the spending overage is interest only. (You have heard of "interest only mortgage loans", right?)...well, that is what the government is, in effect, doing. The "asset" that the government is borrowing against is of-course the human capital of future productivity.
THE INTEREST EXPENSE is 15-16% of the BUDGET, but remember, this interest is paid to holders of Treasury Bonds (maybe, you). Your personal budget may have about this much in interest expense but at least you have an appreciating asset to back it up. What does the government have? You and me and our continued desire to make money and pay taxes. The annual growth rate of the economy is between 2% and 4% on the average and that is healthy but barely keeping up with this interest expense that increases at just under 3% per year. The government uses 1.8% for its future 10 year projections of the budget as a baseline.
MY WARNINGS AND RECOMMENDATIONS: (1) Watch out for inflation because that makes the borrowing more expensive for you, me and also for the government. (2) Don't be a borrower and (3) Do live within your means and (4) Encourage your Congress to do the right thing and live within their means, too. Also, when it comes to retirement, (5) Think very carefully about choosing a pension annuity (if you are one of the lucky ones that even has a pension) if that monthly payment is not indexed to inflation.
ON ANOTHER MATTER: THE CALCULATION OF THE CPI (Consumer Price Index)
Many have rightfully bemoaned the attention that economists, central bankers, and the financial media have given to core inflation. They say, excluding food and energy from the inflation discussion is disingenuous to the many millions of Americans putting gas in their tanks and heating their homes at ever higher expense.This is sensible criticism to be sure - most people would have difficulty disputing the misleading nature of core inflation to the average consumer. However, there is an even more glaring problem with core inflation - the extent to which inflation reporting for owner-occupied housing distorts the end result.Removing Home Ownership Costs from the CPI: It is common knowledge that the homeownership component of the CPI consists of owner's equivalent rent instead of the real cost of homeownership. This was done back in 1983, for what some would say were dubious reasons:
Until 1983, the bureau measured housing inflation by looking at what it cost to buy and own homes, considering factors like house prices, mortgage interest costs and property taxes. But given the shifts in interest rates and housing prices, those measures could show big bounces from month to month. Besides, homes are a strange hybrid of a consumable good and a long-term investment. As part of a long-running evaluation, the bureau wanted to "separate out the investment component from the consumption component" of the housing market, said Patrick C. Jackman, an economist at the bureau.
Not coincidentally, taking home prices out of inflation reporting seems to have had a very calming effect on reported inflation.
Since 1983, home prices and inflation have mostly gone their separate ways. At times there has been a distinct inverse relationship between the two, as can clearly be seen during the housing boom and bust of the late 1980s. During this time, initially home prices rose as inflation fell. Then, when that housing boom went bust in 1990-1991, inflation ticked up noticeably. And here we go again with a housing boom in 2003 through early 2006 and followed by another housing decline in prices now (early-late 2006).
So, a natural question to ask, given all the discussion of inflation over the weekend, is "What if homeownership costs were to once again be included in the inflation calculation?" Home prices have clearly become "disconnected from their moorings" of rental prices, to borrow a phrase from Fed Chairman Alan Greenspan - maybe it's time to include them again. In light of the discussion of "headline" inflation vs. "core" inflation, it is natural to ask, "What would core inflation be today if home prices were included?" Core inflation still excludes food and energy, but including housing...Your answer would be:
5.3%
In all fairness, a portion of housing should be eliminated because it is more related to investment than consumer spending, but what has been done is not quite the right answer either. Also, when talking about the CPI one must remember that QUALITY is incorporated in the rate also. For example, cars are more expensive today than 10 years ago (as a matter-of-fact, since 1955 cars have doubled in value every 10 years - that is an inflation rate of about 7%) but there is much more quality in cars than years ago. Today we are buying gas efficiency, all wheel drive, antilock brakes, air bags, seat belts, etc. Same for houses. The square footage has increased on average from the homes of post World War II (about1,800 square feet to 2,400 square feet) and the quality of plumbing, air conditioning and other areas has increased prices, too - at least somewhat.
MY FINAL RECOMMENDATION: Something to consider with all this talk about inflation is the rate you use to calculate future needs. Inflation is real so make sure you include a reasonable number in your calculations for retirement.