How High is Inflation Really?

If we stop at the gas station to fill up the tank it is obvious that prices have done nothing but go up, up, up these days.  What is even more worrying is that it isn't only fuel costs that have skyrocketed.  Two years ago it would cost about $100 for a trip to the grocery store.  This would provide all of the staples for two weeks.  In a month, the total bill would be about $250.  Lately I am budgeting $300 a month and finding that I consistently go over budget.   It isn't a scientific measure by any means but it feels to me like my buying power has dropped by as much as 25% in two years.  How is that possible?

The official figures for the Producer Price Index, which measures the cost of goods at the wholesale level, rose 0.3% in February and 1.0% in January as reported by Forbes.  Year over year inflation clocked in at a 6.4% rate.  This trend seems to be accelerating to an annual rate in the neighborhood of 7.8% for 2008 based on the most recent readings.  Of course, the policy makers and talking heads bring up that "core" inflation increased at a 2.4% rate year over year.  Core inflation my @$$.  The core inflation rate excludes the cost of food and energy, and be honest, that is completely idiotic.  Exactly what matters to the average person is the cost of FOOD and ENERGY.

Now, what do these inflation numbers mean to you?  It means that if you haven't gotten a 6.4% raise in the last 12 months that you are loosing ground, going backwards, in the earnings game.  Are you in line for a 7.8% raise in 2008?  If not you should start planning now for how you will cut your spending and reduce fixed expenses.  The money won't go as far as it once did and something has got to go.  I feel fortunate, in that it is very likely I will get a raise during 2008 that will be somewhere around 4-5%, but my plan to increase my Roth IRA savings by half that amount (2.5%) may be sidelined in the effort to keep up with rapidly rising prices.   If that is happening to me, I know it is happening to many people all around the country.  We will be the lucky ones; I don't even want to think about how tough it would be to face this inflation on a fixed income.

Another important note is that I have heard a great deal of chatter and online commentary that inflation numbers (which already appear elevated) from the Labor Department are still understating inflation.   I am not prepared or qualified to debate the issue of exactly what the rate may be, but obviously it could be a scary time we do indeed return to double digit inflation as some have suggested.  The bottom line is that inflation has reared its ugly head and if it is 5%, 10%, or 15% it will play a big part in the economic story of the next several years.

Now I want to point out that the media and the government are often wrong about these things as much as they are right.  There is also a component of self fulfilling prophesy whereby the more we talk about high inflation the more it happens.  I don't want to be a Chicken Little and add more fuel to the fire so here is my advice, "prepare for the worst but hope for the best."