The CPI (Consumer Price Index) is the government's measure of inflation. However, many items are not in the index. For example, the annual increase in property taxes which in Loudoun County, VA have averaged about 6-7% per year. If property taxes are 30% of your mortgage and your mortgage is 30% of your annual income, then the overall effect on your personal rate of return is about .50% (a 1/2 of 1%) without even calculating any other areas.
Calculation of that one item that is not in the CPI: (30% of 6% = 1.8% and 30% of 1.8% is .54%)
According to the Journal of Financial Planning (November 2008 issue), in 2005, 75% of the price change to light duty trucks and cars came from quality improvements. Many of these quality improvements were mandated by the same government that removes them from the price index. Now, everyone does not buy a car every year but if you are doing good financial planning you are saving to replace that car on an annual basis. Vehicles appreciate at the rate of about 7.5% per year - much higher than the price index.
Keep this in mind and calculate your personal CPI. It is different than what is reported but you knew that already and read my other posts on "Economy-Inflation".
An Introduction
Hi. Welcome to BourGroup and my blog. Phil
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.
Showing posts with label Economy-Inflation. Show all posts
Showing posts with label Economy-Inflation. Show all posts
Thursday, January 28, 2010
Wednesday, January 20, 2010
Inflation-Indexed Annuities or Other Products
The inflation-indexing feature of some annuities needs to be carefully evaluated. For a 65-year old man an inflation-indexing feature may cut his initial payment by nearly 3% (7% to 4%, for example) and would not surpass the conventional (non-indexed to inflation rate) for 12 years if inflation averaged 4%. Therefore, your income need and longevity play important parts.
The same goes for other inflation-indexed products (for example, long-term care). And, in addition, if the inflation index used is the CPI and health care costs are increasing at double the rate of inflation, then paying for this additional feature may still find you with a large disparity when and if you need the coverage.
And remember, unless you select a certain paid-up period plan feature, then you will be paying premiums until needed. Be sure you understand the inflation index used.
The same goes for other inflation-indexed products (for example, long-term care). And, in addition, if the inflation index used is the CPI and health care costs are increasing at double the rate of inflation, then paying for this additional feature may still find you with a large disparity when and if you need the coverage.
And remember, unless you select a certain paid-up period plan feature, then you will be paying premiums until needed. Be sure you understand the inflation index used.
Tuesday, September 29, 2009
Capacity Utilization and Inflation
Things that could - possibly - dampen current "inflation scares":
"...An acceleration in productivity relative to recent trends in real wage growth [little increase in wages with the high unemployment we are experiencing in late 2009] can have an important damping effect on inflation..."
The Wall Street Journal reported on September 21, 2009 the following statistics which corroborate Dr. Ben Bernanke and the Federal Reserve that inflation is not the concern today:
56% - hotel occupancy rate (the lowest since 1987)
14% - percentage of airplanes in storage because of, in part, weak demand
33% - percentage of rail cars in storage
66% - capacity utilization (a favorite % of mine which was 82% in 2003 and averages 75%)
"...An acceleration in productivity relative to recent trends in real wage growth [little increase in wages with the high unemployment we are experiencing in late 2009] can have an important damping effect on inflation..."
The Wall Street Journal reported on September 21, 2009 the following statistics which corroborate Dr. Ben Bernanke and the Federal Reserve that inflation is not the concern today:
56% - hotel occupancy rate (the lowest since 1987)
14% - percentage of airplanes in storage because of, in part, weak demand
33% - percentage of rail cars in storage
66% - capacity utilization (a favorite % of mine which was 82% in 2003 and averages 75%)
18 - million vacant homes
15 - million unemployed
With this much "slack" in the economy, inflation is, it seems, going to have a difficult time rearing its ugly head. However, that said, we will once again - some day - be in a 2-3% inflationary environment and that may be the worst of all. Why? Because it is imperceptible.
Small rates of inflation degrade your purchasing power (reducing it in half) every 20 years or so. That is a powerful loss in your investments and why financial planning is important and, why, in retirement, distribution planning is essential.
A concern for spending too much in retirement also needs to be weighed against the other extreme of reducing your lifestyle beyond what is desired out of fear that you will not have enough. One of my 9 steps is knowing when "enough is enough". Have a financial plan.
Thursday, September 24, 2009
Inflation and the Federal Reserve
From the Federal Reserve's 9/23/09 meeting:
"...With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time..."
"...With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time..."
Tuesday, September 22, 2009
Monetization of Debt and Inflation
Richard Rahn, senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth, on September 22, 2009 wrote a very good article entitled "The Growing Debt Bomb". He states that the current government deficits (annual over-spending) and the $12+ trillion debt (the cumulative amount over many years of over-spending) may result in higher inflation and higher interest rates.
In 1862 the deficit that year was about 12% of GDP, in 1919 it was 16% and in 1948 (after WW II) is was 25%. That is the one year deficit. The total debt, in 1948 also hovered near 90% of GDP. With the current 2009 deficit at about 12% of GDP we are way beyond the normal rates of 3-6% of GDP and the total debt of $12+ trillion is 85% of GDP.
My reminder, is that we have been through this before.
Let me try to balance this legitimate concern of future inflation (that, indeed, we may have).
Here is an interesting white paper from the Federal Reserve on Government Debt and how it affects us and the economy. It was written in 1998 (it is 73 pages long if you are interested in an academic approach/study of this issue):
http://www.federalreserve.gov/pubs/feds/1998/199809/199809pap.pdf
Yes, a deficit can be the source of sustained inflation but only "...if it is persistent rather than temporary and if the government finances it by creating money (through monetizing the debt)...", rather than Treasury bonds in the hands of the public or other government agencies.
Yes, money has been printed (created out of thin air) "big time" during this crisis that is over 2 years in the making.
And, yes, the deficit for 2009 is very, very huge from a normative, historical perspective. I agree. It also was necessary to avoid a major depression. I believe that from my studies of the subject.
If this deficit is temporary, then it may minimize somewhat some inflationary after-affects. Is it? Based on the Congressional Budget Office (CBO) latest 10-year projections the deficit is expected to continue but not at this 2009 level and will be back to about 3% of GDP within two years.
That is still unacceptable to me and still raises the total debt annually, but not nearly a $1.5 trillion or more deficit year after year - that would simply be untenable.
With debt monetization (The Fed purchasing Treasury Bonds in open market operations), government debt is eventually reduced but with inflation usually taking its place. But it is:
the EXPECTATION OF INFLATION that is the "real" problem, not the actual inflation rate.
It is not just the growth in the money supply that needs to be observed but also (1) changes in bank reserve requirements and (2) the declines in the money multiplier (3) unemployment rates and (4) the slack in capacity utilization (currently at 69% of production capacity versus an average of 75% and a high of over 82% just before this crisis). For that #4 reason alone, we were probably headed toward an inflationary environment but this financial crisis came upon and ended that temporarily and so maybe we should be thankful for this reprieve.
It is the job of a central bank (our Federal Reserve System) to earn, through its actions, the public's confidence in its commitment to price stability. If done, the expectation of inflation is lowered. Dr. Ben Bernanke has studied the Great Depression at length and I believe his actions of debt monetization (printing money and flooding the markets with liquidity - money) are absolutely necessary to avoid an economic disaster of even worse proportions.
Can he manage future inflationary pressures? Yes, I believe he can and there are many methods to do this, just as there are many ways to provide liquidity to the system, in addition to interest rate manipulation. This latest change in the Federal Debt, though large, "...may still have a smaller effect on interest rates if it occurs in the contraction rather than the expansion phase of the [business] cycle..." (from Daniel L. Thornton; Senior Economist with the Federal Reserve's white paper on Monetizing the Debt; 1984).
Monday, April 6, 2009
Inflation on the Horizon?
I do not believe inflation is on the horizon.
Much is written these days about the impending inflation (or even hyper-inflation) that we are doomed for as a result of all of this government spending, Treasury and Federal Reserve loaning, and the printing of money the U.S. does not have.
No, inflation is not an immediate concern but deflation is still a legitimate concern but it is beginning to dissipate even now.
If this money flooding the system was creating a fictitious demand for goods and services beyond companies ability to supply those goods and services, then yes, inflation could be a by-product. But in these economic times, the extra money is being used to pay down debt and build capital. It is not creating new demand as much as the powers at be would like it to do so.
The economy is not performing normally right now, so deflation (especially in housing) continues to be the problem and, based on the extensive studies of Dr. Ben Bernanke amongst others, this needs to be addressed with money supply. He made a great speech in 2002 on this matter that you can read at www.federalreserve.gov ). He is doing now the things he believed would be necessary if we had a financial situation like we are in today.
As a recent Washington Post article stated "...only when unemployment is low again can workers demand higher wages, forcing companies to raise prices..." then inflation may rear its ugly head. That is still a year or more away.
I am not convinced that even inflation cannot be controlled. At least, dangerously high inflation of double-digits, can be controlled because Paul Volcker showed us how to do that in the early 1980's and President Obama has him on his team now.
It is the 2-3% annual inflation that goes with fiat money (a financial system like the current world's system) that is the most damaging - not double-digit rates - and this will return.
Much is written these days about the impending inflation (or even hyper-inflation) that we are doomed for as a result of all of this government spending, Treasury and Federal Reserve loaning, and the printing of money the U.S. does not have.
No, inflation is not an immediate concern but deflation is still a legitimate concern but it is beginning to dissipate even now.
If this money flooding the system was creating a fictitious demand for goods and services beyond companies ability to supply those goods and services, then yes, inflation could be a by-product. But in these economic times, the extra money is being used to pay down debt and build capital. It is not creating new demand as much as the powers at be would like it to do so.
The economy is not performing normally right now, so deflation (especially in housing) continues to be the problem and, based on the extensive studies of Dr. Ben Bernanke amongst others, this needs to be addressed with money supply. He made a great speech in 2002 on this matter that you can read at www.federalreserve.gov ). He is doing now the things he believed would be necessary if we had a financial situation like we are in today.
As a recent Washington Post article stated "...only when unemployment is low again can workers demand higher wages, forcing companies to raise prices..." then inflation may rear its ugly head. That is still a year or more away.
I am not convinced that even inflation cannot be controlled. At least, dangerously high inflation of double-digits, can be controlled because Paul Volcker showed us how to do that in the early 1980's and President Obama has him on his team now.
It is the 2-3% annual inflation that goes with fiat money (a financial system like the current world's system) that is the most damaging - not double-digit rates - and this will return.
Thursday, October 18, 2007
CPI Index - Don't forget what is NOT included
SS will increase 2.3% for 2008
Wage base for taxability will increase 4.6% for 2008 (6.2% on first $102,000 now)
CPI supposedly at 2.1% (Oct'06-Sept'07). Really?
We all know that items such as housing, autos, and certain high-tech items such as flat screen TVs and computers are falling in price.
But how many houses, autos, or flat screen TVs does the average consumer buy in a year? Very few, right?
What most people miss, however, is that housing and autos added together represent just under two-thirds of the total CPI number!
Oh...don't forget, that taxes are NOT included in the CPI numbers. So property taxes (in Northern VA have averaged 6-7% increase annually over the past 10 years), increased sales taxes and park fees, etc. are not included.
Wage base for taxability will increase 4.6% for 2008 (6.2% on first $102,000 now)
CPI supposedly at 2.1% (Oct'06-Sept'07). Really?
We all know that items such as housing, autos, and certain high-tech items such as flat screen TVs and computers are falling in price.
But how many houses, autos, or flat screen TVs does the average consumer buy in a year? Very few, right?
What most people miss, however, is that housing and autos added together represent just under two-thirds of the total CPI number!
Oh...don't forget, that taxes are NOT included in the CPI numbers. So property taxes (in Northern VA have averaged 6-7% increase annually over the past 10 years), increased sales taxes and park fees, etc. are not included.
Wednesday, October 3, 2007
Dollar Weakening
Make no mistake about it, the Fed fears inflation being made worse by a plunging U.S. dollar. And, yes, the dollar is at its lowest valuation to other currencies than ever - ever. But, will it continue to go lower or are there other stabilizing market forces that will stem the tide of further devaluations. At least, that no more "plunging" occurs. Yes, down a bit more is possible, but be prepared for this to level off at some point and for the dollar to rise again in the coming years.
What goes up must come down means that what goes down must come up, also. Of-course, a complete collapse of the dollar is quite unlikely since the U.S. is still the largest economy by far - four times the size of its nearest competitor Japan.
What goes up must come down means that what goes down must come up, also. Of-course, a complete collapse of the dollar is quite unlikely since the U.S. is still the largest economy by far - four times the size of its nearest competitor Japan.
Sunday, September 30, 2007
Government and Inflation
RECESSIONS AND DEPRESSIONS are difficult periods to live through but INFLATION is always a looming danger because the Gross Domestic Product is $12 trillion dollars but the federal debt amounts to more than half at $7.8 trillion (2005) and now $8.9 trillion (2006). The annual deficit hovers around $400 billion and consumer debt (not including mortgages) is at an all-time high of $2 trillion.
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
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.
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.
Friday, June 15, 2007
More Inflation News
For years, the cost of food has been a shrinking burden for most American families. At the beginning of the 20th Century, we spent 43% of our incomes on groceries -- but by the beginning of this century that had fallen to just 14%. So, for the most part, food prices have been of little inflationary concern.
This is interesting how the spending patterns change over the century.
This is interesting how the spending patterns change over the century.
Wednesday, September 27, 2006
Food Prices and Inflation - 2007
Market Watch is finally paying attention to "real inflation" not this "pie-in-the-sky" 1.8% rate we hear most of the media and government touting:
HEMPSTEAD, N.Y. (MarketWatch) -- Just when you thought it was safe to stop worrying about inflation, along come higher food prices to change your mind.
Nowadays, lots of attention is being paid to falling energy prices and their impact on the overall price level. With the price of crude oil slipping below $60 a barrel on Monday, down from over $75 less than two months ago, many pundits, politicians and the press are hoping that the Federal Reserve will soon declare victory over inflation and start cutting interest rates.
Not so fast. There's a little matter of rising food prices that needs to be reckoned with. And, as you know, food is every bit as important as energy.
The Commodity Research Bureau reports that spot prices of foodstuffs have jumped 14% over the past six months; 8% since June alone. At the wholesale level, prices of finished foods rose at an annual rate of nearly 17% in August, according to the Bureau of Labor Statistics, while retail prices of meats, poultry, fish, eggs, fruits and vegetables went up at more than a 12% annual rate last month.
HEMPSTEAD, N.Y. (MarketWatch) -- Just when you thought it was safe to stop worrying about inflation, along come higher food prices to change your mind.
Nowadays, lots of attention is being paid to falling energy prices and their impact on the overall price level. With the price of crude oil slipping below $60 a barrel on Monday, down from over $75 less than two months ago, many pundits, politicians and the press are hoping that the Federal Reserve will soon declare victory over inflation and start cutting interest rates.
Not so fast. There's a little matter of rising food prices that needs to be reckoned with. And, as you know, food is every bit as important as energy.
The Commodity Research Bureau reports that spot prices of foodstuffs have jumped 14% over the past six months; 8% since June alone. At the wholesale level, prices of finished foods rose at an annual rate of nearly 17% in August, according to the Bureau of Labor Statistics, while retail prices of meats, poultry, fish, eggs, fruits and vegetables went up at more than a 12% annual rate last month.
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