The “I” word…INFLATION – has long been the dread of economists and financial planners alike.
Inflation can wreak havoc on individual savings and on lifestyle…” a dollar just doesn’t buy as much as it used to” means that with higher inflation comes the reduction of your purchasing power.
Note: Purchasing power can simply be defined as the amount of goods/ services that can be purchased with a unit of currency. (I recently returned from Italy (using the Euro), and found my perceived purchasing power somewhat diminished there, even though the currency exchange rate was favorable. You are welcome to disagree!)
If you think that the rate of inflation does not matter much, think again. According to LIMRA* research, a 1% inflation rate could cost approximately $34,000 of retirees income benefits over a twenty year period.
According to thebalance.com: The CPI measures inflation, one of the greatest threats to a healthy economy. It eats away at your standard of living if your income doesn't keep pace with rising prices. Over time, it increases your cost of living.
For more technical information about the CPI; what it means; its importance and how it is calculated – go to thebalance.com website.
Calculating Annual Inflation Rates
Annual rates of inflation are calculated using 12-month selections of the Consumer Price Index (CPI) which is published monthly by the Labor Department’s Bureau of Labor Statistics (BLS).
For example, to calculate the inflation rate for January 2017, subtract the January 2016 CPI of "236.916" from the January 2017 CPI of "242.839." The result is "5.923." Divide this number by the January 2016 CPI and then multiply by 100 and add a % sign.
The result is January 2017 annual inflation rate of 2.5%.
In June of 2018 the annual inflation was 2.9%. In June of 2019 the annual inflation rate was 1.6%. (from BLS tables)
Interesting, the Core CPI excludes food and energy from its formula. Things like food and energy are more volatile in pricing and are therefore excluded from the calculation of the CoreCPI.
Two simple ways to combat the effects of inflation: lock in higher interest rates on cash accounts that you hold and seek to lock in lower fixed rates on debt that you have.
Understanding how inflation can affect your savings and your retirement planning is a key factor to a more financially secure future.
*LIMRA – (formerly known as Life Insurance and Market Research Association) offers valuable research including extensive retirement research.( limra.com)
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