Inflation . . . It’s A Tax!

Speedometer that is at the highest point with the word inflation beflow it

I just got my gas bill for home and I am not happy.  No one should be happy with a 40% increase in cost over the past year. Heck, if you’ve filled up at the gas pump lately, you’ve probably felt the walloping of rising gas prices. Just take a breeze through Shaw’s to experience inflated food prices.  The cost of many of everyday items has increased significantly . . . with no end in sight. These price increases are due in large part to our usually quiet friend, inflation. Inflation is often called the “silent killer” of retirement plans due to its ability to sneak up on us slowly, eroding the purchasing power of our dollars over time. For example, a $1 million portfolio today will be worth just $672,971.33 in 20 years, assuming a relatively low 2% inflation rate₁.

Make no mistake, our currently high inflation has been driven largely by poor economic policies from the White House and “blank-check” spending by our Washington Wizards on capitol hill.  This coupled with supply chain disruptions and pent-up consumer demand for goods following the reopening of the economy in 2021 has put us in a pickle. The latest edition of the consumer price index showed that inflation was running at a pace of 7.5% in January, representing a 40-year high. The cost of everything from rent to dairy to used cars rose in January, showing how inevitable the run-up in consumer prices has been. In fact, according to a report by Moody’s Analytics, the average household is spending an additional $250 a month, or $3,000 per year, because of soaring inflation₂. 

While this seems pretty high – but is this really true for everyone? Well, as with most things, it depends. I regularly discuss inflation with folks as part of the retirement planning process because it can be such a big risk to our retirement security. Take my friend Janet, not her real name of course, who stopped into the office last week. Now in her mid-sixties, she’s been a widow for almost a decade and spends a few days each week volunteering at a local women’s shelter in Hyannis. Not having any children of her own, she says that holding the babies each day is her dream job! She and I met recently for her annual check-in, and she seemed surprised when I cited the current inflation figures. From her perspective, she hadn’t really noticed that she was paying much more for everyday items, and certainly not an additional $250 each month. 

Now, just because the annual inflation rate is 7.5 percent, this doesn’t mean that’s the rate everyone experiences. As I said, it depends. The CPI, which is what the government uses to measure inflation, is based on the things that a typical urban consumer would buy. So if you live outside of, say, New York, Boston, San Francisco, or Los Angeles, you could experience lower inflation than what the CPI says, but not always. And while the West and South have the highest inflation at nearly 8 percent, the mid-Atlantic, has the least at 6 percent₃.

It also matters what you buy and the services you use. For example, over the last year, the price of gasoline has gone up 40 percent. If you drive a lot, you feel that pain at the pump. And it’s the same at the grocery store where CPI prices have jumped 7.4 percent overall, with meat leading the way at 12 percent. But if you stick to fruits and vegetables, prices went up just under 6 percent, while dairy products were up just 3 percent. You see, it can make a difference what you decide to buy and where you decide to live. And the closer you are to the supply chain, the easier it is to get the food to your grocery store and thus the lower the price will be.  

Let’s look at clothing, too. While it also went up 5 percent, once again, it really depends on what you buy. While women’s dresses jumped 11 percent, girls’ apparel actually dropped slightly in prices.  However, I must say as a father of three girls, I am not so sure of this statistic.

When I explained these factors to Janet, they made sense to her. As she told me, her car is a subcompact car averaging 32 miles per gallon.  She’s also a vegetarian, so naturally she hasn’t paid attention to the rising meat prices. She has noticed that the price of cheese has increased significantly (her “can’t do without” favorite food), and she does acknowledge the cost to heat her house has increased by 40-50%! 

Folks, the bottom line is that inflation is often times a middle class to lower middle class tax that must be addressed in any sound retirement system.  How you’re affected by inflation will be somewhat unique to you and your lifestyle choices. While you can’t control inflation itself, by carefully managing what you buy, you may find ways to keep your personal inflation rate well below 7.5 percent. 

So as always – be vigilant and stay alert, because you deserve more!

Have a great week.

Jeff Cutter offers investment advisory services through Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, and Mansfield. 

Jeff can be reached at Insurance products, including annuities, are offered through Cutterinsure, Inc., (MA insurance license #2080572). Cutter Financial Group and Cutterinsure are affiliated and under common control but offer services separately. Members of Cutter Financial Group’s management receive revenue directly from Cutterinsure. Any compensation received is separate from and does not offset regular advisory fees. Cutter Financial Group does not charge advisory fees on any insurance products. We do not offer tax or legal advice. Always consult with qualified tax/legal professionals regarding your own situation. Investing in securities involves risk, including possible loss of principal. Insurance product guarantees are backed by the financial strength and claims-paying ability of the issuing company. This article is intended to provide general information. It is not intended to offer or deliver investment advice in any way. Market data and other cited or linked-to content in this article is based on generally available information and is believed to be reliable. Please contact us to request a free copy of Cutter Financials’ Form CRS, Form ADV 2A and applicable Form ADV 2Bs. 1.  2.   3..