Inflation – A retiree’s enemy

Definition of inflation – “an increase in the price you pay for goods or services or a decline in the purchasing power of your money”.

The key statement in the definition is the “a decline in the purchasing power of your money”.

When people are saving for retirement, they usually invest in stocks which increase in value with the economy and therefore are not hurt by inflating prices. However, these assets are not as secure as fixed assets such as CD’s so most retirees investments are in the safer non-inflating investments.

When the investments are in fixed dollar investments, inflating prices decrease the purchasing power of these funds over time.

For this reason, one must save additional amounts before retirement to compensate for future loss of purchasing power of retirement savings during retirement.

On the bright side, if you own your house, its value will grow with the inflating economy and the value of the housing market in your area.

Who Measures Inflation Rate?

In the United States, this is measured as a percentage of the change of the consumer price index (CPI) which is published by the Department of Labor – Bureau of Labor Statistics (BLS) (http://www.bls.gov/CPI/) on a monthly basis.

The news release about the monthly change in the Consumer Price Index can be read at http://www.bls.gov/news.release/pdf/cpi.pdf. This news release also gives the overall inflation rate for the month and breaks it down into its components as shown in this example:

Report for May 2008								Compound annual rate 3-mos. Ended	Un-adjusted 12-mos. Ended

	Changes from the preceding month
Expenditure
Category	Nov.	Dec.	Jan.	Feb.	Mar.	Apr.	May
	2007	2007	2008	2008	2008	2008	2008	May-08	May-08
All items..........	0.9	0.4	0.4	0	0.3	0.2	0.6	4.9	4.2
Food and beverages	0.4	0.1	0.7	0.4	0.2	0.9	0.3	5.9	5
Housing...........	0.4	0.3	0.2	0.2	0.4	0.3	0.5	4.9	3.3
Apparel...........	0.6	0.1	0.4	-0.3	-1.3	0.5	-0.3	-4.3	-0.6
Transportation....	3.5	1	0.5	-0.7	0.7	-0.7	2	8.7	8.1
Medical care......	0.4	0.3	0.5	0.1	0.1	0.2	0.2	1.8	4.1
Recreation........	0.2	0	0.2	0.1	0.3	-0.1	0.1	1	1.2
Education and
communication..	0	0.3	0.4	0.1	0.3	0.4	0.4	4.2	3
Other goods and
services.......	0.2	0.3	0.4	0.2	0.4	0.5	0.4	5.3	3.6
Special indexes:
Energy............	6.9	1.7	0.7	-0.5	1.9	0	4.4	28.2	17.4
Food..............	0.4	0.1	0.7	0.4	0.2	0.9	0.3	6.2	5.1
All items less
food and energy	0.2	0.2	0.3	0	0.2	0.1	0.2	1.8	2.3

The following table shows the inflation rate in the United States by year since 1940:

Average Inflation Rate - United States by Year
Year	0	1	2	3	4	5	6	7	8	9
1940	0.7	5	10.9	6.1	1.7	2.3	8.3	14.4	8.1	-1.2
1950	1.3	7.9	1.9	0.8	0.7	-0.4	1.5	3.3	2.8	0.7
1960	1.7	1	1	1.3	1.3	1.6	2.9	3.1	4.2	5.5
1970	5.7	4.4	3.2	6.2	11	9.1	5.8	6.5	7.6	11.3
1980	13.5	10.3	6.2	3.2	4.3	3.6