Cosmic Cocktail in 2 weeks: Get your ticket today before they sell out.

CPI fails to reflect retirees' inflation

Fill up your gas tank or buy a gallon of milk, and you can't help but think that the inflation rate that comes out each month doesn't reflect the pounding your wallet is taking.

That's Lois' complaint. The Baltimore County retiree's pension and Social Security benefits are pegged to the Consumer Price Index. This year, for instance, her Social Security benefits will go up 2.3 percent. Yet the price of one of her prescription drugs has shot up 50 percent in the past five months.

"Every time I buy milk, it's gone up. Bread is almost $3 for a loaf. I remember it being 10 or 15 cents," the 72-year-old says.

She's puzzled how the government comes up with a tamer inflation rate than her experience.

Lois is right. The CPI doesn't match your personal inflation rate. The national inflation rate is all about averages. And none of us is average.

The latest inflation rate for the year that ended in November is 4.3 percent. It was 3.4 percent in the Baltimore region for the first half of the year.

Here's how the federal Bureau of Labor Statistics comes up with those numbers:

The government created a basket of goods about seven years ago based on the spending habits of more than 30,000 consumers in urban areas across the country. The basket is updated every two years to capture changes in our purchases. That means if we all became vegans, meat products would be jettisoned from the CPI.

Government data collectors each month call or visit stores, service providers and even doctor's offices to track price changes in about 80,000 items.

Not every item gets equal weighting in the calculation, though.

Housing makes up the biggest component. The CPI assumes 43 percent of our spending goes to shelter.

Food and beverages make up 15 percent of spending. Education is about 3 percent. And prescription drugs account for 1 percent.

This may explain why Lois' personal inflation doesn't match up with the average. Lois doesn't pay tuition. But her drug purchases could be higher than average.

Here's another twist. There's more than one CPI. The most widely mentioned is the Consumer Price Index for All Urban Consumers or the CPI-U. As the name implies, it doesn't include rural consumers or those in the military.

Lois' Social Security benefits are pegged to the Consumer Price Index for Urban Wage Earners and Clerical Workers or CPI-W. (Ironically, there are no retirees in that index. To switch indexes would take an act of Congress.)

The Bureau of Labor Statistics publishes an inflation rate for those 62 and older, called the CPI-E. The annual inflation rate for the CPI-E was 4.16 percent in November.

It's unusual that this rate is lower than the traditional inflation rate, says Patrick C. Jackman, an economist with the Bureau of Labor Statistics. The reason it happened is that the index for older consumers gives less weight to gas, and fuel prices have shot up, he says.

Lois isn't the only one dissatisfied with the CPI.

H. Craig Rappaport, a financial adviser in Radnor, Pa., says financial planners using historic inflation rates often underestimate price increases for future retirees. He predicts aging baby boomers will put such demand on the health care system that prices will shoot up.

Rappaport devised an inflation index for retirement, giving greater weight to medical costs and travel and less emphasis on, say, suits for work. The Rappaport Retirement Index puts inflation for the year that ended in November at 4.47 percent, slightly higher the CPI.

Some economists say the CPI isn't perfect, but it's still a good indicator of inflation.

It may not seem that way to consumers because the items they buy on a weekly basis - gas and food - are going up, says Jay H. Bryson, global economist with Wachovia Corp.

Milk, for instance, soared more than 23 percent in 11 months, according to November figures. Energy prices rose more than 21 percent over a year.

Still, Bryson says, even though it seems like you're buying a lot of these items, they still account for a smaller portion of your entire purchases.

Economist Jackman says people also tend to remember "the price of items going up and not those going down." Clothes, for example, are cheaper than a year ago.

Still if the inflation rate held steady, what costs $100 today would be $153.61 in a decade.

That's why it's important to have investments that keep up with inflation.

Stocks are a natural since their returns over the long run outpace inflation, says David A. Wyss, Standard & Poor's chief economist.

"For most retirees, TIPS should be a significant part of your portfolio," he adds.

Treasury inflation-protected securities, or TIPS, are interest-paying bonds whose principal is regularly adjusted to keep up with inflation.

Questions? Comments? Contact Eileen Ambrose at 410-332-6984 or by e-mail at eileen.ambrose@baltsun.com

Copyright © 2019, The Baltimore Sun, a Baltimore Sun Media Group publication | Place an Ad
48°