Navigating Inflation

If you didn't study history you would think that inflation would have been the fallout during the Great Depression of the 20s and 30s. Inflation was actually non-existent from 1920 through 1939. In fact the average annual inflation rate for the 1920s was a measly 0.08% and a negative 1.94% for the 1930s.

Inflation, defined as an increase in the price of goods and services, wasn't a problem through WWII, the Korean conflict, the decade of the hippie(Puff the Magic Dragon) until the decade of the 1970s when it soared in excess of 7% per year and continued through 1982. It coincided with the Nixon decision to remove the dollar from the gold standard.

The primary benefit of the Gold Standard was that it guaranteed long-term price stability. In other words real monetary policy could not be manipulated by central banks as long as they were on the Gold Standard. Unemployment was an issue under the Gold Standard but inflation wasn't.

Consumer Price Index is not the same as inflation even though people quote and even confuse the CPI number as the rate of inflation. The CPI math calculation uses sleight of hand in crunching the numbers. The government uses an arbitrary year as a base year to set the base number 100. Everything is then calculated off that base year. Currently it is 1984 but a few years back it was 1967. The CPI is calculated every month based on a basket of products but does not include food and energy which gives a false reading as both are items used by all of us including those living on fixed incomes.

Government like a little bit of inflation. It shows the economy is growing. Wages almost always lag all other inflation indicators which is the biggest reason that people never feel like their making headway or living any better today then they did yesterday even though they have bigger cars, homes and toys then they did a decade or two back.

Contrary to wide spread belief inflation will not drastically impact every lifestyle when it does arrive. Those most affected will be those that need to buy goods and services such as the young and middle-aged adult with children. College education, health care, new mortgage interest, energy, utilities and food will increase in cost. But if you are retired and do not need to buy new appliances, cars and furniture while not sending kids to college, inflation will impact you modestly.

Retirees can prepare themselves for an almost certain inflationary period by eliminating all variable debt in exchange for fixed (including home mortgages), purchasing needed major appliances, cars and furniture now and making sure they do not lock in long-term fixed interest savings.

Energy and food expenses will certainly be problems for many retirees. However with some adjustments to current savings and investments those increases can be nullified. The biggest challenge will be for retirees to recognize and accept changes in their investments and savings. Something probably more difficult then anything peace negotiators in the Middle East have encountered.