In the second week of August, we received news that the Consumer Price
Index for All Urban Consumers (CPI-U) was unchanged in July, after rising 1.3%
in June. This was welcome news to many economists, as most predicted a
slight increase.
But before we think that inflation has plateaued and might start trending
downwards, let’s remember that one month of data does not make a trend.
Especially when over the last 12 months, inflation has increased at a very high
8.5%.
Look at The Details, Not
Just Headlines
Unpacking the data from the Bureau of Labor Statistics (they compile the
Consumer Price Index data), shows us that:
- The gasoline index fell 7.7% in July and
offset increases in the food and shelter indexes, resulting in the all
items index being unchanged over the month. - The energy index fell 4.6% over the month
as the indexes for gasoline and natural gas declined, but the index for
electricity increased. - The food index continued to rise,
increasing 1.1% over the month as the food at home index rose 1.3%.
Lots of Inflation
Indices Were Up in July
Further, according to the Bureau of Labor Statistics:
“The index for all items less food and energy rose 0.3% in July, a
smaller increase than in April, May, or June. The indexes for shelter, medical
care, motor vehicle insurance, household furnishings and operations, new
vehicles, and recreation were among those that increased over the month. Some indexes declined in July, including those for airline fares,
used cars and trucks, communication, and apparel.
Yes, the Consumer Price Index “only” increased 8.5% for the 12 months
ending July, a smaller figure than the 9.1% increase for the period ending
June. But:
·
The all
items less food and energy index rose 5.9% over the last 12 months.
·
The
energy index increased 32.9% for the 12 months ending July, a smaller increase
than the 41.6% increase for the period ending June.
·
The food
index increased 10.9% over the last year, the largest 12-month increase since
the period ending May 1979.”
Inflation: The
Retirement Killer
Inflation decreases
the purchasing power of your money in the future and unfortunately, many don’t
factor inflation into their retirement plans.
Consider this: at
3% inflation, $100 today will be worth $67.30 in 20 years – a loss of 1/3 its
value.
That same $100 will only buy you $67.30 worth of goods and services in 20
years. And in 35 years? Well, your $100 will be reduced to just $34.44.
What Investors Need to Remember
Therefore, it is
imperative that your long-term retirement strategies account for inflation and
that you prepare for a decrease in the purchasing power of your dollar over
time. You should strongly consider assuming that inflation will be more than 3%
– its historical average.
It’s true that
inflation today hovers over 8% – quadruple the Federal Reserve’s target
inflation rate – but a better assumption might be one based on the last 100 years of data.
If you’re wrong and
you find that the inflation rate for the next 25 years turns out to be 2%, then
the purchasing power of your retirement savings will be more, not less.
Your financial professional can create models with various inflation scenarios so you can better
understand – and account for – inflation’s true impact on your retirement.
