Inflation: Why you're not getting a raise this year

Inflation doesn't happen in a vacuum. It's a consequence of the Federal Reserve "printing" scads of money through tactics like keeping short-term interest rates artificially low. In the beginning, this creates some welcome effects, such as "rising" home v

If you're like most Americans, don't count on a raise this year. The Los Angeles Times reported on Monday: "For the first time in 14 years, the American workforce has in effect gotten an across-the-board pay cut."

In other words, inflation is back. The cost of living, measured by the federal government's consumer price index, rose 2.7 percent in 2004 and the first two months of this year. Wages rose an average of only 2.5 percent, according to the Los Angeles Times. A Wall Street Journal article, also on Monday, gave a slightly better figure: white collar workers received a 3.4 percent raise.

The consumer price index is, however, a heavily-manipulated statistic that has been carefully crafted by the federal government to understate inflation.

That means the once-mighty U.S. dollar is being devalued -- that is, losing its purchasing power -- much faster than 2.7 percent a year. This should be no surprise to anyone who's filled up a gas tank recently. Richard Benson has taken the time to dig beneath the surface and report these raw numbers compiled by various federal agencies:

Gasoline: 47.5 percent increase from Nov. 2003 to Nov. 2004
Crude Materials: 25.9 percent increase
Groceries at supermarket: 6.1 percent increase
Housing costs: 13 percent increase from 3Q 2003 to 4Q 2004

Bill Gross, who manages the world's largest bond fund at PIMCO and knows something about this topic, calls the federal consumer price index a "con job." He estimates that the CPI is understated by at least one percentage point. Other estimates are far higher (again, look at prices for houses, gasoline, and college tuition).

The implications of this are deeply disturbing. For one thing, if we accept that "real" inflation is perhaps 4 to 5 percent, a savings account with a 2.5 percent return before taxes is actually losing value every year. It's even worse when you take taxes into account. And if you own stocks that have gone sideways or down in the last year (PHLX Semiconductor down 19 percent, NASDAQ down 3 percent), inflation makes the bite exceptionally painful.

Inflation doesn't happen in a vacuum. It's a consequence of the Federal Reserve "printing" scads of money through tactics like keeping short-term interest rates artificially low. In the beginning, this creates some welcome effects, such as "rising" home values. But then the inflation beast really starts to roar. As economist Ludwig von Mises said: "This ignorance of the public is the indispensable basis of the inflationary policy."

At least this time, when your 2005 raise doesn't cover your higher 2005 expenses, you'll know who to blame.

 

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