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Bob’s Journal for 3/28/19

Last update on: Sep 18 2019

Your retirement plan should assume inflation will be higher than the published numbers, whether you already are retired or still looking forward to it.

The most widely cited measure of inflation is the Consumer Price Index (CPI) for all urban consumers. This measure generally has been declining since it peaked in the early 1980s.

In recent years, with the exception of a few months, the measure has been below the Federal Reserve’s announced goal of at least a 2% annual rate. Longer-term, it has averaged about 3%.

But the published CPI shouldn’t be the basis of your retirement plans. To generate the CPI, the Department of Labor’s Bureau of Labor Standards (BLS) takes a list of goods and services that it believes represent the shopping basket of a typical urban or suburban American family. The bureau checks the prices of those items around the country each month. The price changes determine the month’s CPI.

One problem with using the CPI as your inflation benchmark is that the weighting of the goods and services isn’t likely to be the same as your personal purchases. Households composed primarily of people ages 50 and over usually buy a different mix of goods and services than younger households.

For example, an older household is likely to spend more on medical care and less on education. In fact, older households have enough differences from the standard basket of goods and services that the BLS maintains a separate index, the CPI-E (for elderly), to track price changes for older households. This is published only periodically, because the BLS considers it experimental. But the CPI-E shows inflation for households headed by those ages 62 and older is a couple of tenths of a percent higher than the CPI-Urban in most years.

There are a couple of other reasons you shouldn’t use any of the published CPIs to estimate your retirement inflation.

One reason is that your mix of spending is likely to be different than any standard basket. Because each spending item has a different inflation rate, any two households are likely to have different inflation rates.

That’s why I created a spending spreadsheet that allows the user to designate a separate inflation rate for each expense. The spreadsheet is available to Retirement Watch members as part of their membership. You can find it at this link.

Another reason not to use a published CPI in your planning is that the Labor Department has made more and more use of a technique known as the hedonic quality adjustment, or hedonic adjustment.

In the adjustment, the government looks at more than a simple change in the prices charged for a good or service. It also adjusts prices for changes in quality or features. The result is you might have to pay a lot more for an item than you used to spend, but because the newer item is higher quality, the CPI may not change the price much or it could even cut the price due to the enhanced value of the product.

An example on the Labor Department website compares televisions over time. The price to a consumer has increased by 400%, and a version similar to the original one no longer is available. Because of the much higher quality of the current television, however, the CPI says the price declined by 7.1%.

More and more items in the CPI receive a hedonic adjustment. The BLS website lists 21 categories of items receiving hedonic adjustments. It also says there are other items that receive adjustments but aren’t on the list. You might be surprised that different types of clothing and apparel comprise more than half of the categories that receive the adjustments.

Even some services, such as internet service, receive hedonic adjustments.

As a retiree, you might like the improved quality of an item. But what matters to your spending plan is the amount of cash you pay for the item.

Don’t rely on recently published CPI numbers when developing future retirement and spending plans. You should put more of a cushion in your plans. You can safely assume that almost everything you buy will increase in price over the years, and that for you, the overall increase is likely to be higher than the CPI indicates.

The Data

The economy slowed a bit in the first few weeks of March, according to the Market PMI Composite Index. The manufacturing component of the index declined to 52.5 from 53.0. The services component declined to 54.8 from 56.0. The composite declined to 54.3 from 55.5.

Manufacturing growth also slowed a bit in Texas, according to the Dallas Fed Manufacturing Survey. The index declined to 8.3 from 13.1. The Production Index component of the survey, however, held steady at 11.5. Both measures indicate growth, but the survey found there was less optimism about the future.

The Richmond Fed Manufacturing Index told the same story, declining to 10 from 16.

This week’s numbers show the economy still is growing, but the growth rate slowed across the board in the last month or so. That’s one reason the Federal Reserve abandoned its tightening policy.

Lower interest rates and a strong labor market are helping housing. Existing home sales increased by 11.8% in February, according to the National Association of Realtors. That’s the largest monthly gain since December 2015. Sales still were 1.8% lower than 12 months ago.

Housing starts and building permits were more mixed, and it’s possible that February’s weather delayed some activity. Housing starts declined 8.7% for the month and 9.9% compared to 12 months ago. Single-family homes were responsible for much of the decline, falling 10.6% over 12 months. Building permits also declined by 1.6% for the month and 2.0% over 12 months.

The good news in the report is that the numbers for the previous two months were revised higher from the initial estimates. Also, housing completions increased 4.5% for the month and 1.1% over 12 months.

Pending home sales declined 1.0% in February. That follows a 4.6% increase in January. Over 12 months pending sales are down 4.9%. The National Association of Realtors says that makes 14 consecutive months of declines in the 12-month number.

Housing prices continue to increase, but at a slower rate, according to the S&P CoreLogic Case-Shiller House Price Index. Prices increased at a 4.3% annualized rate in January, compared to 4.6% last month. They also increased 3.6% over 12 months, compared to 4.1% last month.

The Housing Price Index from the FHFA found prices increased 0.6% in February compared to 0.3% for January. That’s a 5.6% increase from 12 months ago.

Consumer Confidence, as measured by The Conference Board, declined in March to 124.1 from 131.4 in February. Both current conditions and expectations declined, but the larger dip this month was the assessment of current conditions.

The third and final estimate of fourth quarter gross domestic product (GDP) was revised down to an annualized growth rate of 2.2%. This compares with a 3.4% rate in the third quarter and over 4% in the second quarter. Consumer spending increased 2.5% during the quarter, and business investment increased 5.4%.

New unemployment claims declined by 5,000 to 211,000. Also, last week’s number was revised 5,000 claims lower. But continuing claims increased by 13,000. The four-week average decreased by 3,250, and last week’s four-week average also was revised down by 4,500 claims.

The Markets

The S&P 500 declined 0.67% for the week ended with Wednesday’s close. The Dow Jones Industrial Average fell 0.46%. The Russell 2000 lost 1.03%. The All-Country World Index (excluding U.S. stocks) sank 1.88%. Emerging market equities tumbled 3.32%.

Long-term treasuries gained 2.80% for the week. Investment-grade bonds rose 1.18%. Treasury Inflation-Protected Securities (TIPS) added 0.13%. High-yield bonds fell 0.10%.

On the currency front, the dollar rose 1.25%.

Energy-based commodities fell 1.30%. Broader-based commodities declined 1.51% and gold lost 0.40%.

Bob’s News & Updates

The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations of key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Seriesclick here.

A recent five-star review of my book on Amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”

I’m a regular contributor to the Forbes.com blog. You can view my contributor page here.

Do your heirs know how to handle an inherited IRA? If not, they’ll join the long list of heirs who made simple mistakes that triggered additional taxes and penalties. To avoid this result, be sure your heirs have a copy of Bob Carlson’s Guide to Inheriting IRAs.

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