Start Preparing for Mega-inflation

Who Inflation Hurts the Most

March 4, 2011

U.S. News & World Report - It ought to be a simple question to answer: Is inflation a problem or not?

It's anything but simple, however. Federal Reserve chairman Ben Bernanke says he's not terribly concerned about inflation, even hinting that he wouldn't mind a bit more of it. The Fed's job is to keep the economy healthy, which is why Bernanke et. al. focus on "core" inflation, which excludes energy and food.

That might seem senseless to ordinary people who need gas and milk to survive, but focusing on core inflation lets the Fed focus on factors it has some control over, like whether wages are rising too fast, which could destabilize the economy. Energy and food prices tend to be driven by external factors like weather, overseas demand, and turmoil in the Middle East, which the Fed can't do much about.

But ordinary people can't dismiss volatile price swings quite so easily, and many Americans rightly wonder how the Fed can be so blasé about inflation when the price of things they buy every day seems to be skyrocketing.

• Gas prices, for example, have risen by about 11 percent this year alone, and now stand at about $3.35 per gallon. With upheaval in the Middle East intensifying, they could easily approach the pivotal mark of $4 per gallon.
  
• Food prices have gone up, too, and healthcare and education always seem to get more expensive.

Inflation, it turns out, varies greatly depending on what kind of consumer you are. To isolate some of the differences, I used data from the Census Bureau and Bureau of Labor Statistics to list the things a typical household spends the most money on. Then I calculated the price increase for each category over the last year, to see which categories are going up in price by the most. Overall inflation over the last year, including all products and services, has been a tame 1.7 percent.

Here's how costs for the other things we spend money on compare:

	Percentage of typical budget	1-year price rise
Rent or mortgage	20.2%	0.1%
Food	17%	1.8%
Utilities	7.2%	1.3%
Healthcare	5.9%	2.9%
Entertainment/recreation	5.6%	-0.6%
Vehicle purchases	5.5%	0.4%
Motor fuel	5.4%	13.5%
Household energy	4%	1.3%
Clothing	3.6%	0%
Furnishings and appliances	3.2%	-2.2%
Telephones and service	2.2%	-1.2%
Education	2.1%	4.2%
Housekeeping supplies	1.3%	0%
Personal care	1.2%	0.7%
Public transportation	1.0%	7.7%
Alcohol	0.9%	2.3%
Tobacco	0.6%	5.2%

Looking over this list gives you a pretty good idea of who thinks inflation is high, and who thinks it's low. Anybody who needs to drive a lot spends more than average on gas, which has gone up in price by more than any other major category over the last year. Lower-income drivers are especially exposed, since they have less disposable income, with fewer things to give up to help pay for increased gas costs. Foregoing your car isn't much of an option either, since public transportation has gotten a lot more expensive, too. Transportation overall, in fact, is a budget-killer—which makes a short commute a valuable asset these days.

Families with kids in college are in a bind, too, thanks to education costs that are rising more than twice as fast as overall inflation. The cost of healthcare is also rising faster than inflation, which is like an added tax of millions of families who pay a portion of their own healthcare, including insurance premiums. Since few employers offer total coverage anymore, that impacts much of the middle class.

Food costs have gone up, too, as grocery chains and producers that have been absorbing cost increases have started passing them on to consumers. Overall, food is up just 1.8 percent, but some categories (which I didn't break out in the table above) are up by more. Meat, poultry, and fish, for instance, has gone up by 6.3 percent over the last year. And food inflation could intensify over the next few months if oil prices continue to rise, since producing and transporting food requires a lot of energy.

"Businesses are reluctant to increase prices very fast," says economist Chris Christopher of forecasting firm IHS Global Insight. "Then all of a sudden they'll do it. We expect food prices to creep up even more."

As the price of staples like food and energy rise, people on low or fixed incomes tend to suffer the most, because there's not a lot they can give up to offset the rising cost of things they need to survive. That impacts a lot of retirees, one reason there was a minor uproar when the government announced last fall that there would be no cost-of-living increase for Social Security recipients this year. President Obama wants to make up for that with a $250 "economic security" payment to seniors, but a Congress eager to cut spending seems unlikely to go along.

Many other consumers feel little price pressure, however. If you don't have kids, you don't have to worry about the cost of education, which is a perennial budget-buster. Younger consumers need less healthcare, which is an economic blessing as well as a physical one. Young families buying and furnishing a home benefit from housing affordability that's the best it's been in decades. Many appliances are actually falling in price, especially those with microprocessors. The price of computers has fallen by nearly 7 percent in a single year, for example; the price of TVs is down a whopping 18 percent.

We don't always notice when prices fall, one reason we don't necessarily pocket the savings. Instead, we buy bigger, better, and cooler gizmos. The iPad 2, for instance, costs the same as its predecessor, but comes with more computing power and better features—so in terms of capability, it's cheaper. Still, people who spend a fair amount of their money on gadgets, entertainment, and restaurant meals are a lot less sensitive to inflation, since some of what they buy is getting cheaper, and fairly minor cutbacks on some things are often enough to cover higher prices for food and energy. To the iPad set, inflation truly is mild.

If there's a simple rule of thumb, it's that younger consumers and people with more disposable income are enjoying low inflation. For many families with kids, retirees, and low-income workers, inflation is higher. And buying an iPad, unfortunately, won't lower your personal inflation rate.

Why Baby Boomers Are Bummed Out

December 29, 2010

U.S. News & World Report - The economy's finally bouncing back, and many Americans are starting to feel a bit more optimistic. But the nation's biggest population group remains in a recessionary funk.

The first of the baby boomers—the post-war Americans born between 1946 and 1965—start to hit retirement age in 2011. And they're not coasting gracefully into the golden years. The entire nation, of course, lost its spunk during the recession that lasted from 2007 to 2009. But the once-upbeat baby boomers seem to be taking the longest to shake off the blues.

According to surveys by the Pew Research Center, 80 percent of boomers say they're dissatisfied with the way things are going in the country, a higher proportion than any other age group, younger or older. Part of that may be natural, since people in their 50s tend to deal with the highest amounts of stress and show the lowest satisfaction levels. But the boomer bummer may also reflect the changing fortunes of America itself, and widespread unease about the nation's future.

The Great Recession clearly hit baby boomers at a vulnerable time, when they were close to retirement or at least should have been preparing for it. But it also seemed to shake their faith in their ability to get ahead and in the opportunity America provides for its people. Baby boomers account for more than one-fourth of the nation's population, and they're sure to have a loud voice in future decisions about taxes, government spending, the huge national debt, and many other matters that will determine if America as a whole prospers or declines. So their views will ultimately affect policies that most Americans will feel. Here's why boomers are so dyspeptic, according to data from Pew and other sources:

They got hammered by the recession. More than any other age group, baby boomers feel their long-term prospects were damaged by the recession. More baby boomers, for instance, say they've lost money on investments and endured damage to their household finances than any other group. The Federal Reserve has been working hard to fix some of that, through policies meant to goose the stock market and help investors regain some of the wealth they've lost since 2006. But household net worth is still down about $9 trillion from peak levels of 2007, thanks to huge losses in home equity and stock markets still down about 20 percent from the 2007 high.

Unemployment is lower among baby boomers than other groups, but it can be particularly grueling on the unlucky boomers who lost their jobs—especially those without a college education. Unemployment, on average, lasts about 45 weeks for those 55 and older, which is 12 weeks longer than for younger job seekers. And unemployed boomers in declining industries like manufacturing or construction may never find work again in the fields where they spent their careers. Younger workers in that kind of predicament have an easier time getting new training, moving if necessary, and convincing employers to hire them. Doing that when you're 55 or 60 is daunting.

They're poorly prepared for retirement. Many baby boomers thought rising home values would anchor their retirement plans, one reason the savings rate plummeted over the last decade. The housing bust—which has driven home values down by more than 30 percent nationwide—wrecked that idea. And far fewer boomers have a guaranteed pension plan than in prior generations, which is likely to leave millions of Americans on the cusp of retirement in a huge hole.

The Center for Retirement Research at Boston College estimates that 51 percent of people between 55 and 64 will face lower living standards once they retire, mainly because they lack the financial resources to maintain their current habits. Many boomers will keep working well past retirement age, if they can find jobs. About 60 percent of Americans between 50 and 61 say they plan to retire later than they planned, according to Pew. And 35 percent of those 62 and older say they've already delayed retirement.

They sense national decline. America was still on the rise when boomers came of age in the 1960s and '70s. It doesn't feel that way any more. Washington politicians mount loud arguments but seem incapable of solving big problems. The huge national debt looms like a black cloud over the nation's economic future. China and India, meanwhile, are growing much faster and taking millions of jobs that used to reside in the United States. Headlines about America's decline may be overblown, since the United States still produces much of the world's innovation (think Facebook, Twitter, Groupon, and the iPad), and still has some of the highest living standards in the world. But boomers feel that progress has slowed, and they may be right about that.

With real incomes stagnant over the last decade, 21 percent of boomers say their standard of living is already lower than their parents' was at the same age. That's a much higher proportion than among younger or older Americans. Boomers are more pessimistic about the future, as well, with just 35 percent of those 50 and older feeling their children will enjoy a higher standard of living than they do. And only 59 percent of those between 50 and 64 feel that America remains a "land of opportunity." Among 18- to 29-year-olds—who suffered far higher unemployment during the recession than baby boomers—70 percent still regard America as a land of opportunity.

They're reluctant to sacrifice. Boomers are well aware of the problems facing America, especially in Washington. But they're nervous about doing anything different, perhaps because they've got so much invested in the system the way it is. One way to raise more government revenue and pay down the national debt is a federal sales tax, for instance, but 54 percent of boomers oppose that idea—a higher proportion than among those both younger and older. Boomers also oppose two other ideas to help balance the government's books—eliminating the tax deduction for mortgage interest, and taxing company-provided healthcare benefits as if it were income—by much higher margins than other population groups.

Boomer opposition to higher taxes is no surprise, since boomers would probably face a bigger hit than other groups with less disposable income. But some of the nation's biggest looming problems—like an underfunded Social Security system and a Medicare program that's on track to run out of money—will also affect baby boomers directly if they're not fixed. Something's got to give. And the baby boomers know it.