How does inflation affect me? Why is it so important? In my last post, I briefly discussed the increasing yields for Treasury notes and bonds. Those yields, particularly on the longer maturities (5 years plus) are the markets perception of inflation.
Inflation, as measured in the government's monthly reading called the consumer price index, is basically rising prices. Ever notice that when you didn't get a raise, you actually do get a "cost of living" raise? That raise is correlated to the rate of inflation. The CPI, while not the best or most accurate is the closest index we have to reflecting the price levels in the economy. In 2008, inflation as tested by the CPI was 3.85%. What does that mean? It means on average that the prices you paid for anything rose by 3.85%.
Now, did you get a raise in 2008 of 3.85%? Did your investments gain a return of 3.85% or higher? Most people don't realize that to stay ahead of things, your salary and investments must stay ahead of this rate year after year. $1.00 today won't be worth $1.00 by next year. Some old timers will say its best just to put your money in a mattress and forget about it. Well, believe it or not, there was a story today where someone threw out a mattress that had $1M in it. If that money was put into reasonable investments, it would have been worth a whole lot more. Before you look at your mattress as a safe deposit box, think again.
Is inflation a problem right now? No, it isn't. The question is what happens next year and in 2011, when all of this government stimulus and hopefully improvement in the housing and job market hits. Is that 3.85% rate in 2008 going to balloon up to 7%? Too soon to tell. Hopefully, this blog will make you look at your mattress and balloons for the kids in a different light.
Stay tuned for my next blog when I'll expound on this into specific examples of how inflation hurts you.
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