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!