Thursday, June 02, 2005

Do You Believe Inflation Is 2%?

Thoughts From Chairman Geo

George Schussel

Inflation at 2%? Can you believe it?

Apr 05, 2005
According to US Government reports the rate of consumer-price inflation in the last year (through January, 2005) was 2.3%. If you’ve been able to keep money in a bank account that pays 3% or more, does that mean that you’ve kept pace with inflation?

If it’s the price of stuff you buy at Wal-Mart, those prices haven’t changed much over the last 3 years. But the price of homes in South Florida increased over 20% just last year alone. In fact many south Florida condos and homes have doubled in price over the last 3 – 4 years. The average price of a Manhattan condo is over $1 million now and those prices have been rising at a comparably high rate.

The cost of traveling in Europe (to American’s with dollars) is up substantially more than 2% per year since 2000 because of the depreciation of the dollar vs. the Euro. Heck, with the strong Canadian dollar, the cost of staying in Toronto or Calgary is up more than 2.3% this year.

Another way to think of inflation is to define it as the change in the value of a dollar. In that sense, the consumer price inflation number is not a good measure of what has happened over the last few years. If you’re a person whose assets have been mostly tied up in your home, you’ve done well and have beaten the government’s official measure of inflation.

On the other hand if you’ve had your net worth tied up in more traditional financial fare such as a salary, or investments like stocks, bonds, or bank accounts, you’ll find that your assets have depreciated by more than the government’s number. If you now want to convert those financial assets into buying a house along many portions of either coast, you’ll find that your dollar only goes about half as far as it did in 2000. For someone in this position, the consumer price inflation index has been a measure of something not very relevant.


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