Monday, April 21, 2008

Inflation is a bitter pill

Do you know what the real rate of inflation is?

Want to try and figure this out together?

Bear with me now, it's going to get a little personal before it turns political. And I'm very sorry, but taxes DO need to be discussed. Inflation is a bitter pill.

After filing my tax return recently, since I had all the numbers at my fingertips, I decided to spend time figuring out what MY real rate of inflation is.

The "official" government published inflation rate for 2007 is 3%. "Official" inflation figures for Jan-Mar 2008 are on track for an annual rate of 3 to 4% for 2008. Using the CPI (Consumer Price Index), our government has constructed a complex calculation of inflation that is highly subjective. It is subjective and therefore subject to political manipulation.

For instance, the "official" inflation rate does not include food or fuel. Is that a bitter pill, or what? If it ignores basic cost-of-living items like food and fuel, what else does it ignore? I'm sure it's not just me having trouble swallowing the bitter inflation fairytale of 3-4%. But why would our government deliberately deceive us? I'll get back to that in a minute.

First, I'll lay out my personal facts, gathered from my own personal tracking of my own personal expenses. Having worked for years in the accounting profession, I'm not completely inept at this sort of compilation. I've categorized my normal recurring day-to-day living expenses very broadly. Here are my major cost changes over the past year which I think illustrate the destructive power of inflation (in just one year):

Groceries and Household Items: Up 37% ! (the price of bread alone has increased by 50% in the last year)

Health Care: Up 50% ! (Rx meds alone are costing my husband & me $3,000/yr out-of-pocket)

Pet Care: Up 75% ! (yes I track pet food, pet supplies and vet care for my two old dogs separately)

Entertainment and Travel: Down 50% ... of course this is a discretionary category which we've cut way back on. Who can afford to travel and entertain much anymore? Not long ago, we were blowing 10% of our annual income on this. BTW, I include gas in this category, so you can see we are really going nowhere!

Routine repair & maintenance of home & autos: Up 16% (note these are actual expenditures & do not include a provision for buying a new car someday)

Fortunately, many categories like utilities, taxes & insurance remained about the same for us. Not for long! our utility provider has just received approval to increase their rates, and our medical insurance has also announced a premium increase effective in July. Since we cut way back on travel, gas price increases did not affect the overall amount we spent on gas (yet). We are very fortunate to NOT have gotten sucked into an adjustable-rate mortgage, so that helps. And with no children, we do not have child care or education expenses to cover.

Still, even with no increases in many expense categories and with the Entertainment & Travel category down by a whopping 50%, overall, we spent 16% more on normal everyday living expenses this year than last year! This is an important number as it represents my own personal true rate of inflation. I bet it's not that much different from many Americans. Why are our real inflation rates so much higher than the "official" government rate?

Well, there is that pesky reliance on the CPI (Consumer Price Index) which doesn't include food or fuel. A better indicator might be found in the Commodity Price Index (also known as CPI, just to confuse you). The Commodity Price Index is used by businesses in order to track the rising costs of their raw materials. I trust it because businesses need to know the truth about their bottom line. Using the Commodity Price Index for last year would yield an inflation rate of 15%. Sound eerily similar to my own personal inflation rate of 16%?

So let's think about it. Who benefits from publishing an "official" inflation rate that is far less than the actual rate? Certainly not people whose wages are tied to the "official" inflation rate, who are told their annual measly 3% raise at least covers inflation. Not retirees receiving social security and/or pension benefits, who think there is a true cost-of-living increase built into their plans. Not fixed income savers either, who depend on interest from their savings, which are being steadily eroded by a higher actual rate of inflation than is "officially" published. In previous inflation cycles, interest rates on savings closely tracked inflation rates. This time, interest rates are being artifically suppressed as true inflation rates are being purposefully underestimated. Coincidence?

Who benefits from that sort of manipulation? If true inflation rates were recognized, our government would have to deal with the facts or go bankrupt. The facts would dictate openly raising taxes. The Bush years have given the wealthiest among us a huge tax cut (unprecedented in a time of war when taxes are usually raised to pay for increased military operations). But politicians know rolling back those tax cuts is an unpopular solution for their wealthy contributors, so they repeatedly try the more subtle approach of manipulating the numbers and hoping we won't notice. They think we believe that the rate of inflation is whatever the government says it is. Do you?

If you do, then you are in for a lifetime of steadily decreasing purchasing power, even though your annual raise covers the "official" rate of inflation. It will be an incremental, year-by-year, systematic impoverishment of anyone whose income is tied to the "official" inflation index. In addition, there are many of us who will need to face that we won't be collecting anywhere near the benefits we paid for & were promised would be there for us in those annual social security benefit statements. Just another broken government promise about which I am bitter.

In the end, it comes down to trust. We need our government to tell us the truth. If the truth means raising taxes, then we must embrace the social economics of what constitutes a fair tax. If taxes are fairly collected and used wisely and fairly, to the benefit of society as a whole, for the betterment of citizen's lives, to provide safe infrastructure, and to ensure quality education and health care, we might just have ourselves something we could be proud of, something that we could proudly pass on to future generations.

So, trust, yeah .... what a concept in a presidential election year! This is what it has boiled down to for me. Who do I trust?
John McCain? No way, he has never even pretended to care about social justice.
Hillary Clinton? Which Hillary? She's all over the board, saying & doing just about everything (including the kitchen sink) to get elected. I don't even know what she stands for anymore. She now thinks the people's votes don't matter, so why would she think our concerns about inflation matter?
Barack Obama? Yup, I trust him. I trust him to pursue the facts, to analyze them & consider intelligent options, to explain to us what those options are, and then together we can go forward and solve the problem. He is a decent man who has not lied to himself or us.

It won't be easy. It's not reducible to a sound bite. But if we want to live in a fairer, more socially equitable country, then knowledge is our first and irreplaceable line of defense. To gain that knowledge, our government must stop lying to us. It would prefer to allow inflation damage to be hidden behind deliberately blurred & outright manipulated statistics, so that promises can be legally kept, while being broken in substance. That's why we must educate ourselves. I trust Barack Obama to help us in this quest for the truth.

By the way, while the "official" government inflation rate for 2008 is being estimated at 3-4%, the Consumer Price Index for March alone was up .8%, which would be an annual rate of 9.6% if this continues for the rest of the year. But, the Commodity Price Index for January-March 2008 is up 5.1%, which would yield an annual inflation rate of 20.4% for 2008. Which index do you think has more validity?

For me, if we are looking at a true rate of inflation of 20%, I need to make some personal changes. Since my 2008 income won't be increasing by more than 3%, I have to figure out how and where to reduce my living expenses by another 17%. And that of course ignores even trying to make up for 2007. Does your 3% Cost of Living raise still sound good to you?

Thanks for bearing with me as I sorted this out in my mind. It is painful to look inflation squarely in the face and realize that only by studying it & the deeply unfair ways in which it redistributes wealth can we hope to outwit it. Our currently blind government has in effect created an Inflation Tax on the people who can least afford it instead of an open & fair tax for all. If we complain, they say we are promoting class war. It's time for a real change! Otherwise we'll soon be choking to death on that bitter inflation pill. VOTE OBAMA!


D.K. Raed said...

Yes you read that correctly, my late-night analysis led me to the realization we may have to raise taxes, and that's saying a lot since I'm not a big tax-and-spend advocate. But that's what happens when you face facts.

TomCat said...

Red, for me groceries and medical care account for around half my budget, so my rate would be higher.

I think raising taxes on the middle class and poor would be a mistake right now. However, we need to roll back the Bush tax cuts for those making over $200,000 per year. That will restore 90% of the lost revenue from them. We need to eliminate the loopholes that allow the top 1% to pay a lower percentage than I do. We need to stop subsidizing corporations who are turning record profits, and we need to eliminate the income cap on social security.

Anon-Paranoid said...

d.k. raed...

I left this over at enigma's site and wanted you to see it too. Please forgive me for being off topic.

For all Ginger's and my friends...

As I sit here barely able to write this and at a loss for words, I wanted to thank all of you for your support and comfort last year when Ginger was poisoned by Hill's MD Dry Cat food.

Over the past week or so Ginger has not been eating very much and with my daughter visiting for my birthday I waited until she went home Saturday before calling the

Up until last week around Wednesday I noticed that she was barely eating. At the time I thought that perhaps she just had a cold or something or just wasn't feeling

By Friday when I got home from work I noticed that she had stopped eating all together and know I had to get her into the Vet to find out what the problem was. My daughter wanted me to take her in Saturday morning, but since her plane back home was a 2:30 pm flight I didn't
want to have her miss the plane.

This morning I called my Vet and
told her I thought that maybe Ginger had eaten contaminated food again, she was not eating or having a bowel movement since Wednesday
and she said I should get her in so the Doctor could look at her.

I took the rest of the day off, headed home and put Ginger in her carrier and headed to the Vet's office.

Once there the Doctor looked at her and the assistant took her temperature. She was unable to get a accurate one as the thermometer could barely be inserted.

They weighed her and she was down to 21LB's since her physical in December. They took her in the back to xray her to see if see may be constipated or if there could be any other problems.

When she came back in she had stopped doing the xray's because after they had done the chest and heart area it showed a Heart problem. Her chest was full of liquid and her heart was floating making it hard for her to breathe. She said i had to see a Specialist and called the Hospital so they would be ready to see her the minute I got there.

She gave Ginger a shot to help her breathe and I paid the bill and headed over to the hospital.

On arriving at the hospital they took her immediately to the back and I waited for a Doctor who was interning to become a Specialist while the Doctor and those assisting her looked at Ginger and the xray's I brought over.

The Doctor whom I saw the first time said Ginger had a Heart Condition and was in very bad shape. They had extracted about 100 Mililiters {I think that's the right work} and around 15ML was a tablespoon and they had done around 8 tablespoons so far. She then went back to assist those working on Ginger.

When she returned she told me that Ginger did have Heart Disease and they would have to get a electrocardiogram to see what was going on with her heart. They had her in a oxygen tent and I was informed of what they needed to do.

I was even ask if it was okay to resuscitate if she went under and I said yes. I was told that she would call me later to let me know what the current status was.

Well I just got off the phone with her and she said Ginger had DCM and it was congenital more than likely.

She informed me that she might not make it out of the hospital and if she did Ginger might only last a month or two.

All her heart walls were thin and she had trouble pumping blood through her system because of this. I don't know if she will be home or not and if it looks like they are unable to get her home or if it appears that there is nothing they can really do for her I told them to put her down.

I paid the over two hundred dollars at my Vet's and two thousand dollars which was a little over the two thirds of her hospital cost which would exceed $2300 dollars.

I would give all I have if she would come home and be healthy, however at this time I don't think I'll be seeing her again.

To all of you who were very supportive last year I want to thank you as your support meant so much too me.

I can't go on anymore, but I wanted you all to know that Ginger and I thank you from the bottom of are hearts.

God Bless.

D.K. Raed said...

Tomcat: BINGO! That is exactly what I meant by "fair taxes".

Anony-P: I'm so sorry to hear what you & Ginger are going through. I left a more detailed message on your blog. Plus I see Engima just put up a post for you & Ginger. I hope you can visit her in the hospital. I wish it was easier to know what's right. Hang in there, we are all thinking of you & sending good thoughts.

enigma4ever said...

thanks for what you said to ANonP....

About the post...excellent..really explained alot- thank you for explaining yet another reason that Obama is better for this country during these $$$ dark times...

( I learned alot that has been fuzzy for me,...and others, because they are not covered well enough...)

D.K. Raed said...

Enigma: I wonder if talking about inflation makes it worse? It seems the more one tries to analyze it, the fuzzier it becomes. I could've blabbed on more, but I think we all know instinctively that inflation is MUCH higher than is being officially recognized. You can't lie at the grocery check-out line.

I DO trust Obama, and not just on the inflation issue. He has conducted himself honestly throughout this campaign. Truth is most important to me. If I know the truth, I am empowered. If I'm being lied to, I end up with Geo Bush & Dick Cheney. I'm so tired of lies.

Fran said...

DK~ Dahling~ You are one heck-of-a-numbers cruncher you are. 3% inflation- my ass.
Things are looking up- cost of gas, everything seems to have gone up- even garbage collection (gas), food (gas), medical, up Up UP!

I'ts a raw deal and I think the game is to not use the r & d words (recession & depression). They think of it like voodoo- if they say those words, it will happen.
But that ship has already sailed (or sunk???)

So there you have it- my recap- the economy is the Titanic.

Cart said...

Red, that post was bloody brilliant. The analysis is reflected here as well, and I'm not sure personal taxation is the answer.
Mind you, corporate tax will soon be problematic, as they are also suffering now. Maybe we should be looking at sucking some cash out of the thieves who have been smart enough to dump out already.
Howsomever, your economic analysis is spot on.

D.K. Raed said...

Oh I hope we don't meet the Titanic's fate! Please let it be just a recession. I had another thought today about the recent steep rise of oil ($117/barrel record high) ... that BushieBoy and his DickiePal oil buddy have some kind of agreement with their Saudi allies to run up oil prices all summer, then as we get closer to the election, they can bring 'em back down and we will be on our knees thanking them. It would be Bush's contribution to helping get another repub prez. well, it was just a stray thought to keep me from contemplating how Jenna's impending wedding will cause americans to lose what's left of our minds!

D.K. Raed said...

Thanks, that is high praise coming from you! I used Econ 101 in college as naptime & I guess it shows! Still, maybe I wasn't clear that I was talking about "fair taxes", which would mean first taking back the big tax cut Bush handed out to his "have more" friends. And I also have to say, if we are talking tax fairness, even though people hate paying taxes, they REALLY resent rich fatcats paying less. We all want to feel that the system is fair.

My thought (however ineptly expressed) was that by keeping the "official" inflation rate low, the govt is able keep their annual COL raises for social security, govt pensions, military, etc, low. If they had to cover the true rate of inflation, they couldn't, unless taxes were raised. But really, this is all a deception, because they are only pretending to pay a COL & hoping we all don't notice that somehow it didn't cover OUR rising expenses.

Now maybe you can tell me how we might "suck some cash out of the thieves who have been smart enough to dump out already" ... any ideas?

Cart said...

DK, you do misunderstand my depth of understanding of economics. I come from the top down, but argue that most people misunderstand the concept and don’t really go beyond markets. You have really focused on the basic dynamics to my mind – how it affects the household.
How do we suck it out of the thieves? My first step would be to put an impost on traders, graduated through from normal (traditional) stock and share trading up through futures, equities and the various market on-selling instruments.
Even a one cent impost on the basics would yield a sizeable return, but it is those riskier (for everyone) trades which should really be penalized.

Cart said...

DK, I can’t just let it go at that. I was talking to others about this and reminded of the:
Tobin Tax I forgot about currency, another facet of the trading market. But all of these traders are the ones screwing us. I don’t see why they should not be paying for the privilege.

D.K. Raed said...

Hey, Cart, I'm for anything that would help stablize currency! I will have to read more about The Tobin Tax tomorrow when I'm more awake. I was just trying to proofread my new post about how Utah, Idaho and Pennsylvania are alike. I hope I didn't paint them unfairly.

In your previous comment about putting an impost on traders ... at first, I thought you were talking about a tariff on imports to ensure that domestic businesses can fairly compete in their own countries. But then I realized you were talking about the stock market, which has always been a total mystery to me. It seems to have no basis in reality. Here we are entering, if not actually in, a recession and yet the stock market continues apace. What is propping it up? Is it all oil futures and defense industry stocks? Because those are about the only corp's doing well now.

Cart said...

I would have thought air and bluff was keeping it all afloat. I have said before that I foresee a corporate loan collapse that will make the mortgage collapse look like a hiccough.
It could well be too late to impose a trading impost, or tax if you like. I expect the bubble will burst before any measures could possibly be taken, even if there were a will to take them.

D.K. Raed said...

Cart: I'm afraid the bubble has already been pricked & is in the process of collapsing. I just hope there is something more substantial 'neath the bubble than mere air.

Anon-Paranoid said...

See link below for voting problems in PA.

Brad Blog

God Bless.

DivaJood said...

"Entertainment and Travel: Down 50% ... of course this is a discretionary category which we've cut way back on. Who can afford to travel and entertain much anymore? Not long ago, we were blowing 10% of our annual income on this. BTW, I include gas in this category, so you can see we are really going nowhere!"

This is my profession: I am a travel agent. The only area of travel still strong is luxury travel - in other words, the Republicans with all the $$$ are still traveling, which keeps me still working. That I cannot afford to purchase the gasoline for my car to get to work is irrelevant.

D.K. Raed said...

I am sorry I had to point out we have cut so far back on entertainment & travel. But you bring up a good point that I hadn't covered ... and that is how everyone reducing their expenses because they can no longer afford the things they used to be able to, has real impact up & down the line. Whether it's travel plans or a new set of tires, inflation will eventually be felt in every sector.

If I could afford the Euro trip we've been planning for yrs, I would be contacting you! First we put it off because our old dogs were too sickly to be boarded for a month. Now we simply can't afford it (and the old dogs aren't doing any better either). For now, it will remain a dream unfulfilled.