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Ever Wonder Why You Seem to Fall Behind – No Matter How Much You Earn?

Back in July we received a notification from our gas supplier that our rates would increase by 13% effective August 1. Not the 2.something percent that the Bureau of Labor Statistics (BLS) keeps telling us prices are rising by based on the Consumer Price Index (CPI), but several times higher. The truly puzzling part is that the double digit increase comes even though natural gas prices have fallen on the order of 40% since the fall of 2014. It’s just a single example, but it illustrates why you seem to fall behind, no matter how much you earn. Prices are going up much faster than what we’re being told by the media.

I realize that our entire economic culture bases inflation on the CPI – government, pensions, employers, economists, academics. But if you don’t mind, I think the number is completely bogus. It’s specifically designed to portray an inflation rate that can easily be tolerated, reality be damned.

Ever Wonder Why You Seem to Fall Behind - No Matter How Much You Earn?
Ever Wonder Why You Seem to Fall Behind – No Matter How Much You Earn?

Now to be sure, there are certain products that are relatively flat price-wise, and some, like oil/gasoline that have fallen in price considerably over the past 12 months. Unfortunately, the price decline in energy is not necessarily flowing through to consumers, certainly not as it relates to food and utilities as we might expect. And if you look at prices where we live and breathe, such as house prices and rents, property, income and sales taxes, healthcare, insurance premiums of all types, education and utilities, the price spiral continues unabated.

So what’s going on here?

Are the Reported Inflation Numbers Even Real?

As I just said, I’m in the camp with the people who believe that the true rate of inflation is intentionally hidden from view. David Stockman’s Contra Corner blog has an excellent article detailing just how inflation is under-reported. It’s it bit dry due to the fact that it has a lot of numbers, but it makes an excellent point.

For example, it highlights how health insurance is reported by the BLS to have increased by just 0.7% in the past year. If you’re on an Obamacare plan you know that this number is a complete fantasy. The Stockman article (actually written by Jim Quinn) points out that the employee portion of employer-sponsored health insurance plans increased by 8.0% in the same space of time. And you know that a private plan purchased on the health insurance exchange had to increase by a lot more than that. So where does the BLS get 0.7% from?

“There are three kinds of lies: lies, damned lies, and statistics.” – Mark Twain

I think that makes the point. But what does it matter to us?

Plenty.

What Under-reported Inflation Does to Us

The basic dilemma is that raises, Social Security cost-of-living adjustments, and interest on savings are calculated based on the CPI. If the CPI is faithfully reported as something around 2% per year – as it has been for most of the past 15 years – but actually inflation is significantly higher, we’re falling behind a little bit each year. You may not notice it from one year to the next, but over a period of five years or 10 years it’s obvious.

Let’s crunch some numbers. Let’s say that in 2005 you were earning $50,000 per year. Since it was costing you $45,000 per year to live, you were able to live comfortably and still bank $5,000.

Because of inflation as reported by the CPI, your employer increased your pay by 2% each year for the past 10 years. As a result of those pay increases, your salary is now almost $61,000. So far, so good.

But if the real rate of inflation over the past 10 years was more like 4% per year, your cost of living increased much faster than your salary. While you were able to live comfortably on $45,000 a year back in 2005, the actual 4% annual increase in prices has increased your cost of living to $66,600 per year.

Now, you’re no longer banking $5,000 a year – you can’t because it now cost you $5,600 per year more to live than what you actually earn.

This explains why you seem to fall behind, no matter how much you earn.

If you’re like most people, you’re probably making up the difference by dipping into savings, cutting expenses, and increasing debt.

Who Benefits from Under-reported Inflation

Generally speaking, institutions benefit from under-reported inflation. This starts with the federal government. A low-inflation rate means low interest rates on government debt, lower income tax indexing adjustments, and smaller cost-of-living adjustments on Social Security benefits, government pensions, and other transfer payments. It’s easy to see why the federal government wants a most modest CPI number.

But banks benefit as well. A low CPI enables the Federal Reserve to keep interest rates low. That means that a bank can borrow from the Fed for substantially less than 1%, and then charge you 19.99% for a credit card.

Employers also stand to gain. The reason why pay raises in the past few years are seldom higher than 2%, is because 2% is also roughly the published CPI number. This means that employers can raise their prices to consumers by, say, 7%, while limiting pay raises to 2% for their employees.

In this arrangement, the institutions always win, and the individual always loses. This is why you seem to fall behind despite increases in your pay. And it’s why the middle class is shrinking.

Price Increases are Built into Both the Economy and Government

So why do we seem to need inflation? Actually, WE don’t. In fact, WE’D be better off without it.

But not the institutions. Government revenues are tied to increasing prices. For example, a municipality can get more property tax revenue as housing in the community rises in price. A state can collect more in sales tax, because the tax is based on price levels. The federal government can collect more in taxes, because those taxes are generally based on the size of the economy. Speaking of which, rising price levels can give the appearance that the economy is growing, even if it is actually stagnating or in decline.

Banks of course love rising price levels. Since so many bank loans are collateralized, it’s critical that those assets rise in value. We saw what happened when collateral values dropped in the housing meltdown a few years ago. Suddenly, what seemed to be rock-solid mortgages turned in the toxic paper.

Companies/employers have a more complex relationship with inflation. If they can raise their prices enough to cover the higher price of supplier goods and services, they may be able to increase profits by keeping pay raises well below the true rate of inflation. But trying to outrun the real rate of inflation at least partially explains why companies reduce payrolls in favor of greater automation, and use of subcontractors and offshore labor. That translates to fewer jobs, and lower wages.

But as you can see, none of this works in our favor as individual citizens.

What Can We Do About It?

If you think we can somehow fix this by lobbying the government, electing the “right people”, or holding protest marches, forget about it. The institutions are too heavily vested in under-reported inflation and will never willingly give up that gravy train. And the public – while most seem to know that there’s something wrong, the whole process is too complicated to fit neatly into a political platform.

The only way to deal with it is on an individual level. Here are my suggestions:

  • Don’t assume it will get better in time. For all the reasons given above, it’s just not set up to improve.
  • Set realistic expectations. Under-reported inflation is affecting almost every area of life, and will continue to do so. That includes career prospects, savings goals, your ability to get out of debt, and even your plan for retirement.
  • Be perpetually cutting costs. That means always looking for cheaper substitutes, or even learning to do without certain products or services.
  • Become fanatical about saving money. A cash-rich position is the best strategy to deal with uncertain prices.
  • Stop borrowing money and get out of debt ASAP! Given the relentless price spiral, the last thing you need is to be adding interest to the cost of everything you buy. That’s to say nothing of the effect of debt in lowering your income.
  • Always be on the lookout to increase your income. I strongly recommend creating and keeping a side business. The two income household may need to become the three income household, or even four.
  • Never ignore inflation in your investment calculations. I mean the real rate of inflation, not the CPI incantation. Planning on a 4% to 5% (subject to change going forward) rate of inflation in this “low-, no-inflation era”, will give you more realistic investment plans.

Using a couple or more of these strategies could keep you from falling further behind, and may even enable you to move forward despite an official inflation rate that comes incredibly close to being a complete fib. Sorry to be the bearer of bad news, but we’re dealing with forces that are not always obvious at the surface. We can’t change “the system”, particularly one that isn’t even officially acknowledged to exist, but we can and should change our behavior in response.

Do you think there’s any merit to what I’ve written here? Do you think it has a significant affect on why you seem to fall behind? If you agree that inflation is being under-reported, what do you think the approximate real rate is? And what do you think is the best way to deal with it?

( Photo by natura_pagana )

8 Responses to Ever Wonder Why You Seem to Fall Behind – No Matter How Much You Earn?

  1. This is good analysis. I’m always thinking about this too – and it often feels like this when I’m making more money too. Costs just keep sliding up. I also think we have more expenses than previous generations had, which keep us feeling “behind” (cable, cell phone, more insurance, medical costs to name a few).

  2. Thanks Aaron! It’s been a while since I was on a salary, but I hear and see the same thing from so many people – max raise is 2%. Meanwhile costs are out of control, not as bad as the 70s, but a lot worse than the happy stories the media and economist tell. On the medical side, we’re being hit on two fronts – higher premiums and higher co-pays and deductibles. That seems to be happening with a lot of expenses.

    There’s an excellent article Shadow Work and the Rise of Middle-Class Serfdom that goes into how companies are also offloading work to consumers, as a form of backdoor inflation. It comes from all the self-service, print your own forms, apply on line, etc. functions that used to be done for us, but we now have to do for ourselves. It may not cost us more money, but it does cost us time, which is a cost. The reasons for the middle class decline are so subtle that you have to do a deep research project to even get close to the causes.

  3. Some things, especially health care and higher education, vastly out pace even your higher estimation of inflation.
    I know people that went to a local state university in the 90’s and paid under $10,000 for their entire four years. Now that same university charges around $40,000 a year. That is insane!
    People at your average state uni are now paying what people used to pay for top tier private institutions such as Harvard, Yale, Princeton, Stanford, Wharton, etc.. This has got to stop. It is saddling our young people with debt they will rarely, if ever, be able to get out from under. See the information from the Solari Report (run by the venerable C.A.Fitts) http://solari.com/blog/special-solari-report-the-student-loan-scam/
    As to the 2% per year raises; I wish I got even that. In the VA state government we only get raises at the pleasure of the state legislature. Many times part-timers get NO raise at all. Even us so-called Classified employees have had only one 2% raise in over five years! There is an appalling gap between supervisory and regular employee salaries. I know supervisors always get more but 100-300% more than their employees? What the heck?

  4. Hi Mary – I’m totally with you on college. When I went you could pay for a four year college degree out of a modest first year salary. It made a lot of sense. I’m no longer certain that’s the best course for most people. There’s also some evidence that a college degree is not as useful as it once was. There was a recent report that 14% of the workforce at either Facebook or Google don’t have degrees (I don’t remember which) but I think that Facebook lifted the requirement for new employees to have a degree. And a friend of mine who does IT recruiting told me that large companies would rather hire non-degreed people from India who have experience writing or trouble shooting code than US college grads.

    I’ve heard of the mutliple-years-without-a-raise syndrome even outside of government. One of my sisters works for a large company and got one raise in five or six years. When a recession hits, all raises are subject to suspension.

    Carolyn Austin Fitts is one of the most brilliant and insightful minds of our time, and I completely agree with her that we need to adopt individual and local micro strategies going forward, as no help will be coming from the system.

  5. I hope more people hear of the Solari Report and Ms.Fitts. I heard of Solari from a Libertarian e-pal a few years back and have been getting their free reports for several years.
    Solari tells the truth without the paranoid, hysterical edge that some of the media tend to promote. It is well-researched and well founded information but not information that is widely disseminated.

  6. I don’t know if you’ve ever seen some of her videos, but she can calmly state things that are chilling to hear. But what I like is that she always has suggestions as to what strategies to take, and will carefully explain why the system can’t be reformed. Since she was in the upper echelons of government in a previous life, I take her comments very serious. What bothers me is how the mainstream media ignore her and people like her. I guess the moral of the story is that if you’re credible and you make sense, the media will have no part with you. They prefer to chase after the Kardashians and other assorted circus acts. It’s like the media can somehow comprehend THEM. Tragic, just tragic…

    She also has a bigger picture take on the inflation situation discussed in this post. She calls it the “Tapeworm Economy” – an economy being consumed from the inside out.

  7. Kevin, as long as we are DEPENDENT on others to provide what we need, we will be at the mercy of the continued INCREASES. I am totally fascinated with alternative energy such as solar and wind to name a few. I am also seriously thinking of investing into the tiny house mania as people are downsizing. Again, there are alternate ways to provide utilities and food for this lifestyle. This way of life is not for everyone and there are no guarantees it will be successful but as I read and watch what is going on, I think it is a very good option for those of us that would like to own our destiny. Self sufficiency and maybe group arrangements is the way to go. Getting back to the past where communities joined together to help each other and do things like the community gardens also seems to be coming back. I think that people are finally realizing that keeping things simple and healthy is the way to go. Yes, it is nice to have the mansion, the boat, the learjet, the vacation house – but is it worth the constant worry that you are going to lose it. Also having “multiple” ways of generating income based on what is needed in your location is wisdom. I am still working on this thought at age 57. Lol, not an easy age to do this but the desire to maintain my independence to the day I die is what is fueling my journey. Yes, if needed I have a child that would be there for me, but it would be nice to not need this and hold my head up in dignity. Great post Kevin!

  8. Hi Angela – I think the key is to keep living expenses low. I like your idea of a tiny house. But I’m more thinking that no house is better, that way you can follow the jobs if need be. But a tiny house is good if you’re either securely employed, self-employed or retired. My wife and I are going to look into getting involved in a community garden in the spring. Not only is it a chance to grow your own food – an activity I learned as a kid – but it’s also a way to build community. I think that’s an under-rated strategy.

    I don’t agree with survivalists who advocate creating a compound in the woods, and storing up food, ammunition, gold and medicine. I think we always need to be out circulating and building live social networks. We all need other people to survive.

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