The Consumer Price Index & The Truth About Inflation

“By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”  – John Maynard Keynes

the truth about inflationRegardless if we’re rich or poor, thrifty or wasteful, inflation is as inevitable as death or taxes. But how high IS the cost of living ? Is the Consumer Price Index a trustworthy guide? And what is the repercussion of underestimating inflation?

In an effort to gauge how much you have to save and how far your money will go in the unforeseeable future, most financial planners will run projections based on 3% or occasionally 3.5%, or even 2.5% annual inflation rates. However, as we’ll see, this can put investors at serious risk.

The dirty secret behind inflation is that it is a lot steeper than we are led to believe. There is a good reason why those 2 or 3% cost of living raises don’t seem to keep pace with the economy … they’re not.

Truth be told, inflation is a moving target. But that’s not the only reason why our dollars seem to keep shrinking.

The truth of the matter is that we have been blatantly and systematically lied to about inflation. By repeatedly changing the way inflation is measured, the government winds up misguiding the public as to the true effect on our wallets. This is good for politicians and the Federal Reserve (which is a private entity owned by commercial banks, run by non-elected government officials), but dangerous for us, not only because we underestimate our need for money in the future, but also because we are ultimately being fleeced.

The Bureau of Labor and Statistics, or BLS, defines the Consumer Price Index (CPI). Measurement of the CPI is crucial because it is the index used to regulate prices and to calculate changes in wages and pensions. Financial planners also use these indicators as a way to predict future costs.

The problem with this pricing methodology is that it paints an untrue portrait of inflation. The CPI measures inflation by the amount of the price of a “basket of goods and services” used by consumers changes over time. But the basket itself actually changes.

For instance, if a family downgrades from beef to chicken because the price of beef has dramatically increased, the comparison doesn’t reflect the real inflation rate. But when beef rises, the Consumer Price Index does just that it changes the items that get measured, because that’s what consumers do – they may substitute something lesser when prices rise.

To quote Investopedia, “Substitution, the change in purchases by consumers in response to price changes, changes the relative weighing of the goods in the basket. The overall result tends to be a lower CPI.”

Not only that, but some important expenditures are left out. For instance, the actual price of purchasing a home is not factored in, only an estimate of what it might cost to rent that home. Since house prices go up in value faster that the CPI rates, the CPI can’t accurately reflect a true cost of living increase.

Statistics from the US Census Bureau show that average home prices rose by over 1600% between 1963 and 2013, from $19,300 to $319,275. However, by using the government’s CPI inflation calculator, $19,300 in 1963 adjusts upwards to only $146,930 in 2013 money. This is reflects less than HALF of the actual appreciated cost of a house over this period!

Perhaps much more disturbingly, we can see on a financial calculator that the actual difference in rate required to inflate a property to $319k as opposed to $147k was the difference between 4.14% to 5.77%.

Simply put, a less than 40% increase in rate led to a 216% increase in prices over a 50 year time period.

how to calculate inflation

On their website, the Bureau of Labor and Statistics even owns up to the fact that the CPI doesn’t properly reflect true cost of living increases:

” Both the CPI and a cost-of-living index would reflect changes in the prices of goods and services, such as food and clothing, that are directly purchased in the marketplace; but a complete cost-of-living index would go beyond this role to also take into account changes in other governmental or environmental factors that affect consumers’ well-being. It is very difficult to determine the proper treatment of public goods, such as safety and education, and other broad concerns, such as health, water quality, and crime, that would constitute a complete cost-of-living framework.”

The bottom line? Critical cost of living increases aren’t factored into the CPI.

One glaring exclusion is the cost of healthcare. Senior citizens spend a lot more on healthcare than younger people, often 20% of their income or more. By utilizing the government figures, a financial planner might calculate that their client can live on less in their later years, but the number would ignore some costly realities., which measures and discusses the CPI in detail, has drawn these conclusions:

  • Since the early 1980s, the CPI has been recalculated repeatedly to underestimate the true rate of inflation.
  • The CPI is not an accurate indicator of the cost of sustaining a consistent standard of living or total out-of-pocket expenses.
  • By utilizing a purely academic approach, politicians and the Fed can manipulate the true rate of inflation so annual adjustments for programs like Social Security can be cut.
  • The ability of seniors, wage-earners and investors to stay ahead of inflation is hindered by using CPI numbers.
  • The illusion of economic recovery can easily be achieved when inflation-adjusted growth is calculated using a model of understated inflation.

The chart below from shows what the CPI might look like if the government hadn’t altered their method to measuring inflation in the early eighties:

how inflation affects your money

The red line shows the CPI as reported, while the blue line indicates how it would read if the measurements weren’t changed over time. This is a classic example of double-speak: we are told the rate of inflation is X when the true numbers indicate Y.

Other collateral damages from this economical sleight-of-hand consist of a false sense of financial security and seniors who are simply unprepared for fiscal realities. The illusion of having enough money can cause us to set impractical goals, believing we have “plenty” of savings when we don’t. Families find themselves using emergency tactics like selling the mortgage-free family home to spend on Mom’s $5000 a-month-fee in assisted living.

Is Money Worth the Paper It’s Printed On?

There are many reasons the government under reports inflation.

  • A low inflation rate does wonders for a politician’s popularity.
  • By skimping on cost of living raises for Social Security and government employees, an over-extended budget may be balanced.
  • It throws up a smoke screen that obscures government and Federal Reserve policies that actually make inflation worse.

As stated in a article The Federal Reserve is Making a Big Mistake,

“The Fed has no excess money or reserves … so they simply fire up the printing presses and print out of thin air $85 billion of new money each and every month. This is money that goes directly into the money supply.”

Printing more dollars may put more money into the money supply and ease short-term pain, but it pushes the value of the dollar down. The temporary illusion of a thriving economy is maintained, but in the long term, prices rise permanently. Adding into that cauldron, “fractional reserve banking”; and the recipe for an endless increase of inflation in the foreseeable future is upon us.

In Legalizing Capitalism, Kel Kelley writes,

“Historically, inflation was defined not as rising prices, but as an increase in the quantity of money in circulation. This definition has changed over time in such a way as to conceal the real source of the rising prices– credit creation and expansion.”

As economist Milton Friedman put it,

“Inflation is taxation without legislation.”

The Federal Reserve with the help of the government can print more money to spend, but this decreases the value of the earnings of consumers who don’t have the luxury of minting more money on an as-needed basis, or who don’t get to use the money first.

The chart below shows the increase of the money supply from 1980 to 2016:

federal reserve system money supply

How Can Investors Deal with Inflation?

There is no magic bullet, but there are four things that can help:

1. Estimate on the high side as opposed to the low side for inflation. Use 4% at minimum, though it may be discouraging to see how your dollars shrink.

2. Work longer and save more. As Kim Butler suggests in Busting the Retirement Lies, the model of working until 65 and hoping you’ve saved enough to live on for another 25, 30, or more years is a simply a broken model that does not work for most Americans.

3. Make inflation work with you by owning assets, not just dollars. Use or leverage against the dollars you have saved (warehouse your money you have saved in high cash value whole life insurance) to purchase income-producing assets such as rental properties or a cash-flowing business, and precious metals such as gold and silver.

4. Support ending the Federal Reserve System, fractional reserve banking, and putting the dollar back on a gold/silver standard. Our economy needs to be a truly “free market”; not one manipulated by banks, Wall Street, and government; which leads to repeated corruption and bailouts with the tax payers footing the bill.

With this, you’ll at the very least be on the right side of the buyer-seller equation when inflation is concerned.

Need help staying on top of inflation?

We can help. Contact us today; we ‘d love to share some strategies to help you beat inflation and keep your dollars from diminishing.

how can we help you?

Contact us to learn more.

Financial Planning has FAILED

Leave a Reply