The Consumer Price Index (CPI) has been in the news quite a bit lately. One CPI data point that seems to me to have not gotten as much discussion and attention as it deserved was the announcement that CPI jumped an unexpected 0.7% in February. This is an alarming spike: the highest monthly increase since 2009.
Some economists and analysts have dismissed the sudden increase, pointing out that if you subtract food and energy increases from the equation, it would have only been a 0.2% increase (which is more in line with expectations). But here’s my concern: how can we not factor energy and food prices in to inflation? Those are the kinds of things that people are spending money on every day! If, like many folks, you are spending the bulk of your money on food, energy, education, and healthcare, the real impact of inflation is likely to be much more significant than the government number crunchers would have us believe.
What is particularly concerning is that there is a conflict of interests here: it is in the government’s best interests to keep inflation low so that they don’t have to pay more in social security and other payments that are indexed to inflation. This is part of what is so controversial about the potential switch to “Chained” CPI, a move that would calculate social security cost of living increases according to an equation that calculates inflation at an even lower rate. This is an ongoing trend: government-issued CPI figures have increased only 2% annually since 2009, but many basic commodities have gone up much higher. Gas has spiked from $2.60 to nearly $4.00 during that time, and a number of indices that incorporate the value of food and commodities have shown increases that far outpace official inflation figures. Even the “Big Mac Index” (which calculates the price of a McDonald’s Big Mac) is up 5.2% per year during that same period!
What does that mean for retirees, pre-retirees, and other investors trying to plan their savings strategies? Well, as respected investment advisor and analyst Gary D. Halbert points out in a recent article:
Those who believe that inflation is only 2%, when it may be 5-8%, may be making investment decisions that are almost guaranteed to erode the purchasing power of their money over time. This is especially true with low-yielding investments such as CDs, Treasuries, etc.
It might be a little harsh to say that the government is actually lying to us, but it is fair to say that their official figures don’t reflect the reality experienced by many ordinary Americans (especially those on a fixed or limited income). Take those CPI numbers with a big grain of salt, and adjust your spending, savings and investments accordingly.