Low Inflation in 2019 – Is It Just a Big Lie?

Perhaps it’s just me. I know that it may be, but every time I see and hear someone talk about low inflation, I immediately think about everything that I purchase that costs more today than yesterday. One of the detriments of getting older is that you can actually remember the prices of things from even 20, 30, and 50+ years ago so yeah, I may have a distorted view of rising prices (at least just a little bit).

The stats show we have low inflation in 2019, but my own observations have me wondering if that's really true. Here's how inflation affects your finances.

But the real story is this, no matter what the government stats try to tell you, the everyday prices of things you buy are going up. Just last week, Fed Chair Jerome Powell said that “inflation is running about what the Fed target calls for: 2.0%” and that’s why he has slowed down the call for interest rate increases so far in 2019. Interest rate increases are implemented to prevent the inflation rate from moving upwards and out of control and so his comments sound like a good read of the current conditions. But are they? Is inflation under control so far in 2019 or is it just a big lie?

Why It Matters So Much and How It Affects You

The inflation rate indicates the health of the economy. Any country with extremely high inflation is said to have hyperinflation and when this occurs the economy is in danger and often near collapse. Take the example of Venezuela right about now. Inflation is so high that people are actually starving because they can’t afford to buy food. This is despite the fact that just a short time ago Venezuela was considered to be a very prosperous oil-rich country and life was good there.

While we are not in the situation that Venezuela is facing, even moderate inflation can rapidly erode purchasing power and create uncertainty as businesses have more difficulty estimating their future costs and so they raise prices.

Usually, higher inflation rates translate to higher interest rates too as lenders need to compensate for the decline in purchasing power and future interest and principal repayments on loans. This results in an overall drag on the economy.

The Actual Numbers at First Glance

The official current inflation rate determined by the Bureau of Labor Statistics only calculates inflation to one decimal place. The Consumer Price Index (CPI-U) notates a better more real view by calculating it with two decimals. Why does that matter? For one thing, it can mean a real spread in the numbers when rounded down to just one digit. An example is when we look at this year’s January and February numbers. According to the CPI-U, inflation is slightly increasing for the two months of this year after it fell for the previous 4 months each month. But according to the “official government” numbers, inflation at 1.5% is virtually the same as it was in January and February.

CPI-UOfficial Gov’t
Inflation Index
February 20191.55%1.5%
January 20191.52%1.5%
December 20182.21%2.2%
November 20182.36%2.3%
October 20182.46%2.4%
September 20182.80%2.8%

The fact of the matter is that it is increasing and I am not just picking on the small 0.03% change in this year’s first two months.

Even though higher inflation is detrimental to our overall economy, it is actually beneficial to the government since it allows them to pay back part of the $22 trillion national debt with “cheaper dollars”. The Federal Reserve has a constant balancing act to try to reconcile the desire for higher inflation with the need for a healthy economy.

Wages and Inflation

There has been a lot of chatter about the increase in wages lately and it is true that for the first time in decades the average wages of U.S. workers have started to increase. Part of the tax cuts passed last year were supposed to stimulate wage growth and that has ever so slightly done it, so that’s positive for anyone who works and hasn’t seen a raise in a long time. But, and it is a bigtime but, increases in wages goes hand in hand with increases in the cost of living as they actually feed on each other.

While wages have been relatively stagnant over the past 20 years, so has the inflation rate which has actually stayed around the 2.0% mark, give or take, most of that time. Now wages are rising and guess what? So is inflation.

The Federal Reserve monitors the inflation rate for its targeting purposes using the “Core Inflation Rate” which excludes food and energy costs and that leads some people to mistakenly believe that the inflation rate is actually being held in check. For targeting purposes, the government excludes them because they are volatile and subject to external forces unrelated to our actual money supply. That’s what they say.

Have You Noticed? I Have

When it comes to the everyday things you buy, you almost can’t ignore the reality of inflation. One of the biggest examples of it is the price of gasoline.

Gas prices are one of the things that trigger people and cause fear and anger pretty quickly. Just think about the situation a few years ago when gas prices spiked to over $4.00 a gallon and even hit $5.00+ in some places. The world seemed to be coming to an end and it took a national commitment to provide more oil and gas as well as some extreme efforts to get the rest of the world to cut the prices.

That along with major growth in self-sustaining energy sources like solar, wind, and water made energy prices go down and eventually the gasoline prices, too. We also drive many more fuel efficient vehicles now and that means the total cost of our gas expense may be lower even if the per gallon cost has gone up and it has.

Gas Prices Around the Country

Gas prices around here in central NJ have risen sharply since January 1st and right now are bordering up to near $3.00 per gallon up from $2.25 just ten weeks ago. I paid $2.68 per gallon just this week and that’s the highest I have paid for gas in well over a year! My numbers aren’t scientific but I do know that my small car is now costing close to $5.00 more to fill up than it did before, and that’s just one of many “volatile” items that I can see and feel myself!

Even if you haven’t noticed it yourself, according to Gas Buddy, the national average price of gasoline has risen 35 cents per gallon since January to an average of $2.58 per gallon nationwide, the highest level since November of 2018.

Gas prices in the Midwest have seen the largest surge with Michigan leading the nation, rising 75 cents per gallon from their 2018 low (followed by Ohio, up 67 cents, Illinois, up 64 cents, Indiana, up 59 cents, and Wisconsin, up 54 cents). Even Florida has joined the Midwest with average prices up 53 cents from their 2018 low. Average gas prices in every state are moving higher and only the West Coast has escaped the biggest hikes, but they always have higher prices than most of the lower 48 states do.

Oil prices have had an impact on rising prices, but a big impact is also from the role and cost of refinery maintenance. Additionally, OPEC countries along with Russia have continued to limit output in an effort to boost prices, which have recently risen to a four-month high, just shy of $66.00 per barrel. Ongoing turmoil in Venezuela is also playing a role in rising oil prices, thanks to the near country-wide electricity outage that curbed the country’s ability to export crude oil. It’s not looking like its going to turn around anytime soon.

But It’s Not Just Gasoline

This year I personally have seen an awful lot of signs that there is ever-increasing strain being placed on my wallet. That probably means yours, too. Since I am not one of the “high wage earners” that have benefited by huge tax cuts and I am not one who doesn’t feel or see the “little” nickel and diming that is going on, I am compelled to call it the way I see it.

Postage stamps, although I don’t use many, increased from 50 cents to 55 cents for first class this year and that’s a 10% increase! My condo maintenance fee continued its annual “no significant reason I can see” routine of increasing another $10.00 per month (that’s a 4.4% increase).

My township’s sewer bill took a step down the drain as well and increased 3.0% this year and will go up again next year (already announced…another 3.0%). As I write this, my real estate tax bill is in the process of increasing and I’ll find out that bad news in just a few more weeks.

My real estate tax increases come despite the fact that my home hasn’t appreciated very much in value and yet the expenditures of municipal government seem to know no end. The same can be said of school taxes and just about every other government entity. They all are going up in cost.

One of the most annoying things our town has done is passing on the cost of paying all taxes and fees due with an ACH draw fee from your bank account or when using a credit card online to pay. It is now assessed as a “convenience fee” and it’s a pretty big chunk of change when applied to a quarterly tax bill! I will avoid that like the plague.

What Can You Do About Any of It?

Number one, don’t just live in a bubble. You must pay attention to prices and what you spend, especially on the recurring basics in life like food, clothing, and shelter. Track your expenses and when you need to, change the way you spend. That’s the premise of super saving. Look for an edge, a deal, and read about them here and other places.

Then take action. It’s not just nice to save money it’s a “prime directive” if I can steal a line from Star Trek!

It’s not difficult to become a smarter shopper. Of course earning more and expanding your knowledge, performing well at your job to get a raise, and working at getting better shopping results are also ways to fight inflation. But it’s a battle that I am afraid you will more than likely be waging for as long as you live. It’s definitely challenging, but it can also be fun and rewarding when you make it a success. I may complain about it, but it does provide me some reason to wake up and write about it every day. I hope you’re listening. Are you?

What are you doing to rein in inflation? Are you feeling it or are you just oblivious to the small but incremental inflation creep that occurs? What do you do to stay on track with expenses of the everyday cost of living?

Related Posts:
What the Inflation Rate Means for You
Inflation is Merciless on Your Financial Future

2 Comments

  1. This was a great piece. This helped me understand how inflation increases the prices of certain things. I do notice when I pay more or less on gas, which seems to always be fluctuating. But I don’t notice it in too many other areas. This has made me realize I need to pay closer attention to this.

    It is interesting because a lot of FIRE bloggers talk about accounting for inflation when you retire. It isn’t clear cut to me how this works because not everything goes up by 3% in cost every year. But maybe that is there to add additional margin? Thanks for sharing.

    1. Thanks, Chris, for your comment. Inflation definitely has a sneaky way of affecting almost everything in your life. Using just the example of the gasoline prices, think about how many of the things you buy get transported around the country by vehicles that use gasoline. That alone ultimately affects retail pricing. As far as retirement goes, if you think that just 2% a year on average over a 30-year period before someone retires will add multiple thousands of dollars to the cost of living which can only be offset by adding streams of income as part of your retirement plan.

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