1) The Federal Government Figures Appear to be Gamed
The Bureau of Labor Statistics (“BLS”) issues the inflation numbers monthly. It’s convenient that the government inserted the word ‘Labor’ into this bureau. Otherwise it would just be “BS”. The number to focus on is the Consumer Price Index (“CPI”).
To do this calculation, they strip out food and energy costs. Their reasoning for this is that these categories are too volatile. Fair enough, they are. But don’t forget, you are still constantly buying food and energy. After these two are removed, this is the so-called Core Inflation Rate. This is currently running at 1.6% annually as of January 2014.
The primary issue with how this number is calculated is what they call “quality improvements.” For example, if you buy a new computer that has more memory, a faster processor and better resolution in the monitor, this is adjusted in the inflation index. The bottom line is that the Core Inflation Index is suspect at best.
2) Investors Must Focus on ‘The Big Three’
When looking at inflation, investors should focus on ‘The Big Three.’ These are:
* Medical Expenses
Everyone will have to face housing and medical expenses on some level. Most will also have to deal with educational expenses for their children or grandchildren. Depending on your station in life, you may be concerned with all three of these or not. A married couple with young children would likely be concerned with all of ‘The Big Three.’ A pre-retiree may, or may not have their housing and education behind them. Someone who is retired may only be concerned with medical expenses. Whether you are faced with one, two or three of ‘The Big Three’ it matters. Does anyone think higher education is only going up 1.8%? It’s not. As a rule of thumb, the cost of higher education has gone up twice the inflation rate.
Housing is different in that it is more geographically influenced and it is cyclical. This means it rises and falls. However, over the long run housing tends to rise.
3) Using the Government Figures may Cause Future Disappointment
The figures issued by the BLS seem artificially low. If investors were to blindly use these figures, they may be disappointed in the future. Savvy investors don’t focus on their gross returns. They focus on their real returns. This is the net return after deducting for taxes and inflation. Taxes are easy to calculate. They are also very painful to pay, but easy to calculate. Inflation may be a little more challenging to calculate.
The information contained in this report does not purport to be a complete description of the securities, markets or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the forgoing material is accurate or complete. Any opinions are those of Thomas F. Scanlon, CPA, CFP and not those necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Tax preparation and accounting services are provided by Borgida & Company, P.C., not as a service of Raymond James. You should discuss your tax or legal matters with the appropriate professional. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.