Guidant Financial Group Blog

Money Magazine had a great article today that explored the basis behind the inflation index, also known as the Consumer Price Index (CPI) (see Inflation: 3 Big Questions).

Apparently, the Bureau of Labor Statistics (BLS), which keeps the inflation scores, is not familiar with circumstantial evidence or inductive reasoning (i.e., the duck test). If it was, it might have concluded long ago that the country was exhibiting all the debilitating symptoms of acute inflation and early-stage recession.

The article explains how the CPI takes into account such things as “quality improvements.” Money Magazine illustrates this as “today's $2,000 laptop is faster and lighter than a $2,000 system from 1998 and can double as a TV, stereo and videoconferencing system.”

Quality improvement? It’s still a lap top, and it still costs $2,000. Based on the above example, many could argue that BLS’s calculations are so subjective they miss the objective reality of today’s economy.

Inflation can be particularly damaging long term – so all the more reason to recognize it early and adjust for it. For those saving for retirement (and that should be all of us), more money will have to be saved to account for the increase in prices in coming years.

For example, Money illustrates, “assuming today's inflation rate of about 4%, a private pension or annuity payment of $5,000 a month will buy only $2,300 worth of goods and services in 20 years' time. If inflation jumps to 6%, the purchasing power of that retirement income will fall to $1,600 over that same period.”

This is why it is important to start thinking seriously about your retirement now – especially those with a self-directed IRA. With all the options available to you, there can be few excuses not to move your retirement money into a portfolio or asset allocation that you believe is more secure and will give you the greatest return . . . whether the BLS thinks the country’s suffering from full-blown recession or not!