Wednesday, November 2, 2011

Your Guide to Tackling Rising Inflation

On the inflation front, news is not very good -- unless you choose to see it another way, that is. Knowing how to interpret the newly released government inflation figures is critical to making long-term plans for needs such as retirement.

The reason for the confusion: The government issues two inflation numbers. First, the consumer price index -- which the Bureau of Labor Statistics defines as "the measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services." That rose 3.9% in the 12 months ending on Sept. 30. That's a serious jump, and quite a bit more than the long-term average of 3%, as well as the Federal Reserve's desired rate of about 2%. If inflation were to continue at the current rate of 3.9% a year, you might expect a $100 item to cost $139 in 10 years.

Easier to swallow is the figure for underlying inflation, which is just 2%. This figure excludes food and energy costs, which are so volatile they can distort the picture significantly in the short term. Of course, we all spend money on food and energy, so what figure should people care about?

No comments:

Post a Comment