The Inflation You Feel… But CPI Barely Counts
Peter Reagan

You’re smart. You already know that, when planning for the future, factoring inflation into those plans is vitally important. 

After all, if your plans don’t account for inflation, how do you know that you’ll actually have enough funds in your golden years to pay for even the most basic of necessities, much less pay for a comfortable retirement with those little perks that make life sweet (like being able to get that slice of cheesecake after dinner instead of pinching pennies and wishing)?

That’s one of the primary reasons that so many people pay attention to inflation rates: they don’t want to be caught short when it comes time to pay for something that they want or need.

But planning to account for inflation can only work if you’re working with accurate numbers.

Are official inflation numbers accurate?

So, the first question to answer is whether official inflation numbers are accurate.

The answer to that question is both yes and no.

Yes, those numbers are accurate… for what they are measuring and factoring in correctly.

But, no, those numbers aren’t accurate in that they don’t reflect the entire reality of how inflation affects each of us. And the fact that they weigh some factors incorrectly into those official figures makes the numbers even further from an accurate account of people’s lives.

Sometimes a concrete, real-world example of what I mean can be helpful, so, let’s look at homeowner’s insurance.

If you have a mortgage on your home, as most Americans do, then you almost certainly have homeowner’s insurance on that home, too (since the lienholder typically requires it). 

But even if you’ve paid off your home, chances are that you have homeowner’s insurance on that home because you want the insurance company to take the risk off of your shoulders should something major happen to damage your home.

So, most people need to include homeowner’s insurance into their budget planning for their retirement years in order to have a reasonably accurate estimation of what they need to have accumulated at retirement to maintain their standard of living.

Pretty straightforward so far, right?

It’s at this point that we start to run into problems.

The problem with planning for inflation

Probably the single biggest problem with retirement planning (other than failing to execute that plan) is that most planning which includes keeping inflation in mind uses official government statistics to figure out how much money that you need.

That’s not necessarily a bad reference point to start the process, but the problem is that most people assume that official government statistics on inflation are comprehensive in their review of what prices are affected by inflation.

And that’s just not the case.

Homeowner’s insurance, for example, is massively underrepresented in official consumer price index (CPI) numbers, which means that CPI can use accurate numbers and still paint a distorted picture of the reality of the situation.

Mike Shedlock writes that, while shelter is nearly 36% of CPI, “household insurance is allegedly 0.414 percent.”

Shedlock then asks, 

If you own a home, what percent of your income is spent on your homeowners’ insurance? Under 1/2 of 1 percent?

I seriously doubt that anyone in the U.S. can honestly say that the insurance on their home is less than a half of a percent of their overall household expenses. That would mean that if you take home $100,000, your average homeowner’s insurance annual premium would be under $500 per year. 

The state with the lowest average home prices in the U.S. is Alabama with an average home price of $220,000. Does anyone really think that $500 per year will cover that home?

(It won’t.)

Some of you reading this are laughing right now because you know how absolutely ridiculous those figures are.

$500 per month (or every two months) is closer to reality in that inexpensive state, and even then, it depends on what part of the state that you live in (the coast is more expensive because of hurricanes, of course).

Now, to be clear, I’m not suggesting that CPI figures are intentionally covering up or hiding inconvenient data for their calculations. CPI is set up to measure "consumable products” costs, and they don’t define insurance as a consumable product.

The problem is that CPI is not measuring everything that affects you or I, and, also, CPI is a nationwide figure. That means that it can’t take into consideration the differences in each part of the country.

So, sticking with homeowner’s insurance, states like Florida have been hit by hurricanes. Texas has been hit by hail and wind. Midwest states have tornadoes. 

And California has been hit by wildfires, earthquakes, and landslides.

So, while CPI says that someone making $100,000 per year should have a house with homeowner’s insurance under $500 per year, in California, which has an average home cost of over $800,000, the homeowner’s insurance on that home won’t be anywhere near $500 per year. Or even $500 per month ($6,000 per year). 

In fact,  after all of the disasters in California, at least one couple in California has a homeowner’s insurance bill of $44,000.

That’s not a typo. $44,000 per year for hometowner’s insurance. The next lowest quote was $80,000 per year.

Those are scary premiums, but other states have higher premiums than CPI, too. For example, Bankrate.com estimates that homeowner’s insurance for the average $300,000 home in Florida will be $5,838 per year with homes at that price point in some towns in Florida having homeowner’s insurance averaging $11,250 per year.

Obviously, your situation will vary depending on which area that you live in (not just which state, but which area within that state).

It’s not just homeowner’s insurance, though. I personally know people who have worked in the auto insurance industry within the last few years, and they’re seeing premium spikes giving a similar sticker shock.

Now, before you say, “That’s horrible, but I live in a state that has low insurance premiums,” stay with me a couple of more minutes.

Why CPI figures are important…

… but maybe mostly important to take with a grain of salt.

Because CPI doesn’t include certain expenses and because CPI can’t factor for cost of living differences in each area, any assets or income tied exclusively to CPI won’t be able to give you accurate numbers to plan for.

Even worse for many Americans, they are depending on Federal programs such as Social Security that tie cost of living adjustments to CPI… which don’t accurately factor in homeowner’s insurance and other expenses.

Even people who aren’t concerned about Social Security’s COLA adjustments, but are concerned about inflation, make a mistake. All too often, they invest in some kind of inflation-indexed asset. The problem is, the "inflation index" is also calculated from CPI.

In other words, those inflation-indexed adjustments won’t adjust for the real world expenses that you’ll have. I'm not aware of any inflation-adjusted asset that isn't indexed to CPI. 

It can truly look like a no win situation. Unless you look beyond the numbers... The trick is to find an inflation-resistant asset that isn't tied to the CPI index. Or to economic growth. One that's historically proven to resist inflation by itself.

You probably guessed by now I'm talking about physical precious metals. Like all commodities, precious metals have intrinsic value. Unlike all other commodities, physical precious metals prices tend to hold their value even during economic downturns. That's thanks to their safe-haven status.

If you’d like to find out more about how to diversify into precious metals in a tax-advantaged way, take a few moments to read over our Quick Guide to Precious Metals IRAs. Gold and silver aren't the only inflation-resistant assets, but they are the only ones I know of that don't rely on the accuracy of CPI to preserve your purchasing power.

 

 

Peter Reagan is a financial market strategist at Birch Gold Group. As the Precious Metal IRA Specialists, Birch Gold helps Americans protect their retirement savings with physical gold and silver.

 

www.birchgold.com