What is YOUR Inflation Rate?

inflationWe all know that our cost of living in increasing, but how much?
The official government statistics assure us that inflation is running around 2% per year. It reminds me of the line attributed to Groucho Marx, “Who are you going to believe, me or your own eyes?”
According to the surveys, real people think their personal inflation rate is around 8% per year with a significant percent of the responders claiming 9 – 11% or more per year. Are you going to believe what the government is telling you or your own experience?

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From Deviant Investor:

Your cost of living increase – your personal inflation rate – may be much larger or smaller than that of the person next door. Your spending choices matter a great deal in determining your personal inflation rate.

 

  • I think we can all agree that some items are increasing much faster than others. A few that come to mind are college tuition, medical care, hospital costs, and health insurance. Several that increase more slowly are postage and milk. If you spend more on medical care and health insurance than on postage, your cost of living increase will be much larger than the person who buys more stamps than health care.
  • If the official CPI goes up, then social security payments increase and total government expenses increase. Hence, government has an incentive to want low CPI inflation statistics. The US government has changed the process and the formula several times since the 1980s. The result, of course, is that the official CPI is low. Maybe it is fair, maybe not, but it is the official story, and it helps keep social security payments low.
  • The various statistical measures used to calculate the CPI have been discussed and criticized in detail in many other publications. In the opinion of many people, they don’t reflect economic reality for most people.
  • Other writers disagree and assure us the inflation rate is low.
    • John Williams, a competent economist and statistician, computes the annual inflation rate at about 9%. He uses the statistical calculation process that was used by the government in 1980.
    • Dennis Miller did an inflation rate survey. It was not intended to be statistically robust – just practical. His readers responded with an average inflation rate of 8%, but 23% of the respondents thought their personal rate of inflation was over 11% per year.
    • The Deviant Investor did a similar survey and received a large number of responses. Our readers thought their average inflation rate was nearly 8% per year, while 39% thought it was higher than 9% per year.
    • Rex Nutting thinks it is close to 3% per year and that most of us are “CPI Deniers.” Mainstream media mostly agrees – but I can’t find anyone (in casual conversation) in a grocery store who thinks food prices are only increasing 2 – 3% per year.

    I estimate my personal inflation rate at about the average found in the surveys – around 8% per year. I am one of those “CPI Deniers.” Most people I know are “CPI Deniers.”

    So How Important is a Few Percent Per Year?

    A few percent seems unimportant, but over a decade it becomes very important. Let’s assume in this very simple example that your expenses increase 8% per year, and your income increases 3% per year. In year one your income was much larger than your expenses, and you saved the difference.

    Sample Inflation Calculation

    Year Income Expenses Net to
    Savings
    1 80,000 60,000 20,000
    2 82,400 64,800 17,600
    3 84,872 69,984 14,888
    4 87,418 75,583 11,835
    5 90,041 81,629 8,411
    6 92,742 88,160 4,582
    7 95,524 95,212 312
    8 98,390 102,829 (4,440)
    9 101,342 111,056 (9,714)
    10 104,382 119,940 (15,558)

    By year 8, in this simple example, the cost increases overwhelmed your income, and you were forced to withdraw from savings. Of course, in the real world, there are more variables and adjustments. We cut back on expenses, increase credit card debt, take a second job, win the lotto, file for bankruptcy – whatever. But the critical point is that your personal inflation rate is important, and a few percent over a decade can make a huge difference.

    What to Do?

    • Cut back on expenses.
    • Get out of debt, and stop paying interest.
    • Increase your income.
    • Start a business, or take a second job.
    • Make investments that pay more than the minimal interest provided by savings accounts and certificates of deposit.
    • Invest in real things – gold, silver, diamonds, land, rental property.
    • Invest in “ABCD,” which for David Stockman is “Anything Bernanke Can’t Destroy.” We Have Been Warned!

    According to the surveys, real people think their personal inflation rate is around 8% per year with a significant percent of the responders claiming 9 – 11% or more per year. Are you going to believe what the government is telling you or your own experience?

 

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Comments

  1. Bought David Stockman’s book. Haven’t got past the first chapter yet. Stockman knows where it’s at.
    “The Great Deformation” is the book and very thick. Stockman is worth listening to and reading. I think I paid
    $25 bucks from Amazon.
     
    Ranger

  2. “If the official CPI goes up, then social security payments increase and total government expenses increase. Hence, government has an incentive to want low CPI inflation statistics.”
    Those are the only incentives? What about the fed’s mandate of price stability? Bernanke has been able to stretch this to 2% inflation but how much resistance would he be receiving if he increased it to 3% ,4% or even 5%? Monetary policy is the only game left–stimulus via fiscal policy has been shut down. If the CPI accurately reflected inflation both monetary and fiscal policy stimulus would be shut down. Furthermore inflation is a hidden tax, and the government has every intention to keep the masses uninformed in this regard.
    I agree that inflation is much higher than what the government currently reports. How high? I’m not entirely sure–probably closer to the 4-6% range. As you state: food, energy, tuition, and health insurance prices has soared. However, I notice the prices of clothing, cars and computers–among other things have remained relatively tame. Although, the other day when I was shopping for a pair of sneakers at an inexpensive retailer I was stunned by the number of pairs marked $100 and up.

  3. “Invest in real things –diamonds, rental property”. LOL!

    The first time I hear, that the “rental property” – is “investment”!

    And show me at least one such idiot who will invest in diamonds?
    http://www.theatlantic.com/magazine/archive/1982/02/have-you-ever-tried-to-sell-a-diamond/304575/

    • Ya diamonds are definitely shit, if they are of a small size. They are not divisible, it’s price cannot be easily determined like for metals, and it’s price depends on it’s cut, color, etc which can only be determined by a diamond dealer or expert. If you aren’t one don’t invest in it. Also the real investment quality diamonds are those of a bigger size which isn’t affordable by the average joe, so one must keep away.
      Rental properties are good investments provided you know what you’re doing and where you’re investing.  

  4. Go get a Second Job. Not! How about taking that time that your going to work that second job, and figure out the Matrix!  Then you can Discharge your Debt through Treasury and reduce the inflation your creating by not following the Law! The Movie the Matrix was put out there for you to Understand. You have to swallow the red pill, unplug yourself from their system. The Debt is not YOURS!
    ROD CLASS vs. North Carolina.  The Police have no more power than a Walmart Security Guard.


     
     
     
    Retired Judge tells Truth
    http://lucas2012infos.wordpress.com/2012/05/25/judge-dale-retired-the-great-american-adventure-secrets-of-america-part-1-5-25-may-2012/#comments

  5. @ imdbstar 
    A small diamond or a large diamond, in any case, you will not be able to sell it for the purchase price. In any case you will lose 40-50% of the purchase and sale of diamonds in the “one window”.
    The only option for making profit by diamonds, if you have a business in this market.

    As for the lease of real estate, I am convinced that this ” expenses” rather than “investment.”

    • It IS possible to make money in diamonds but I would agree that it is a LOT easier when one is in that business.  For the sake of simplicity, there are two basic grades of diamonds:  investment grade and jewelry grade.  I omit the industrial grade diamonds from these comments, since few people buy them. On rare occasion, an investment grade diamond will be made into a very expensive piece of jewelry.  Prices of such things tend to rise with time because these stones are among the few truly rare diamonds that are perfect in their clarity, brilliance, and geometry.  With regular jewelry grade diamonds, not so much.  These are usually sold to unsuspecting noobs at a 400-500% markup, so even if their prices were to rise over time, it will be a LONG time before that markup is recovered via a higher price.  Because of the huge markup in lower-end diamonds, many stores can offer 50-60% off sales and still make a lot of money because they only paid $200 for that “$1,000 stone” they are now unloading for $400-500.

    • Agree with Ed_B,
      Investment grade diamonds are good for investment unlike jewelry grade, and you really need to be quite rich to enter into the investment grade diamond market, not something for the average noob. Besides that you need to befriend a diamond expert or be in the business or be a diamond expert yourself to accurately determine the price of a diamond. Not something for the average Joe. Jewelry grade diamonds are a rip-off and you’ll lose a big percent of your investment once you exit the jewelry shop. one must be an idiot to invest in lower grade diamonds.
      In case of silver, gold and other metals price determination is easy. It just depends on the purity and weight, unlike for diamonds.
      Investing in investment grade diamonds is similar to investing in paintings. You need to know what you’re getting into and it’s only for the super rich, not the middle class.  

  6. With rising medical costs and insurance rates my inflation rate is around 20%

  7. Talking about investment grade diamonds, the ‘koh-i-noor’ is yet ‘priceless’ at no1 in the list of the most expensive diamonds. with no3 ‘the cullinan’ estimated to be $400 million dollars. So i’m guessing the ‘koh-i-noor’ would be a good investment. If one could afford it :P
     http://en.wikipedia.org/wiki/Koh-i-Noor
    http://mostexpensivediamond.org/
     
     

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