On the Money Trail
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Inflation in America: A Glimpse of Reality
by Al Jacobs, author of Nobody's Fool
June 2007

An article in the local newspaper a few days ago commented on the cost-of-living increase by which Social Security recipients received enhanced benefits at the beginning of this year.  At that time, payments increased by 3.3 percent from the prior year.  Thus, a retiree that received, for example, $1,200 monthly during 2006 saw that check grow to $1,239 in January 2007―a munificent rise of $39.  Reading a bit farther down provided an explanation of how the amount was determined, based on 1973 legislation providing for automatic cost-of-living adjustments (COLAs).  The Social Security Act established a formula by which annual percentage increases match those of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of one year to the third quarter of the next.  A further modification in 1983 limits the COLA if assets in the Social Security trust funds are insufficient to pay the increased amounts, but such limitations are yet to occur.

What particularly attracted my attention was the assigned value of 3.3 percent.  Somehow it seemed inconceivable that the cost of living increased by no more than that over the past year.  I wondered what determined that number, so decided to delve into the details.  Please join me on what proved to be a fascinating excursion.

The Consumer Price Index (CPI), adopted as a measure of the average change in prices over time of goods and services purchased by households, is calculated by the Bureau of Labor Statistics, an agency within the U.S. Department of Labor.  The CPI is supposedly based on the cost of those things that people buy for day-to-day living, such as food, clothing, shelter, utilities, transportation, and medical expenses.  Digging a bit deeper, I located the specific indices assigned to each category, and finally found myself enmeshed in an overwhelming mass of statistics that covered such factors as weightings of data by geographic area, cross-classifications of regions, sub-apportionment of population-size classes, allocation of spending patterns to appropriate consumer groups, and seasonal adjustments.  It quickly became evident that no comprehensive evaluation of the system seemed possible.   If I hoped to reach any cost-of-living conclusions, it must be done in a way to square with my view of reality.  It seemed reasonable to review my own family’s personal living expenses over the past year, selecting items I hoped would match the government’s choices.  As for my results, you may be the judge.

● Among our regular purchases in the food category are milk, pasta, coffee, and chicken.  A half-gallon of Alta Dena non-fat milk from Von’s Market recently increased to $3.69, up from $2.99 a year ago.  This is a 23.4 percent rise.  A pound of spaghetti, also from Von’s, sells for $1.89—no change from last year.  That’s pretty good, considering they haul it all the way from Italy.  The coffee my wife prefers—I don’t drink the stuff—is the acid-neutralized Kava, an 8-ounce jar commanding $12.49 at Von’s.  A year ago $10.49 bought the same jar.  Like it or not, that’s an increase of 19.1 percent, though maybe it’s because of a drought in Brazil, or something.  As for chicken, it’s the Foster Farms boneless and skinless fillet breasts from Ralph’s Market that we favor, now priced at $6.99 a pound.  My wife swears that last year they were priced at $5.99, representing a 16.7 percent boost.  I certainly hate to impugn the government’s numbers—perhaps her memory is faulty.

● We’ll now take a peek at clothing.  Actually I don’t need much of that anymore.  I’m still getting good use from a pair of Keith Highlander cordovan shoes (a manufacturer that went out of business in the early ‘70s), and a wool herringbone jacket from the Georgetown University Shop, that fits as nicely today as when I bought it in 1965, as well as a fine forest green crew-neck sweater from Sak’s Fifth Avenue’s 1961 collection—though it’s on its third set of elbow patches.  But, returning to today, the Brooks Brothers Slim Fit oxford cloth dress shirts, for which I paid $65 last year, now show up in their current catalogue at $75; that’s an escalation of 16.4 percent.  Another needed commodity, boxer shorts, can be found at $22.50 a pair.  Though only 7.1 percent more than last year’s $21.00, it’s still more than twice the established 3.3 percent COLA.  I wonder where Uncle Sam buys his shorts.

● The next item, shelter, is a major expense for most Americans.  As my wife and I own our home without mortgage, we’re not very representative.  However, my knowledge of housing costs is firsthand.  Reviewing my manager’s reports on a 60-unit apartment complex I own in the eastern Los Angeles County community of Pomona, I compared the rental collections for April 2006 against those for April 2007.  The numbers: $55,045 versus $61,937 for an increase of 12.5 percent.  Still another factor in the cost of shelter is homeowners insurance.  The year 2006 saw the premium for our home at $2,177.11.  In 2007 it escalated to $2,405.61, reflecting a surge of 12.6 percent.  Although I understand the reason for the jacking—losses by the insurance industry due to extensive claims—such aberrations nonetheless put a dent in many citizens’ pocketbooks.

● When analyzing utilities, variables can complicate the picture.  To keep it simple, I’ve confined the evaluation to baseline rates: the set cost of electrical or thermal units.  Our electricity, provided by San Diego Gas & Electric, is generated at 6.871 cents per kilowatt-hour.  A year ago it was 6.487 cents.  That’s up by 5.9 percent.  Our natural gas, graciously piped in by Sempra Energy, comes at a tab of 69.362 cents per therm.  Twelve months ago the same therm got delivered for 62.902 cents.  In light of this 10.3 percent run up, to whom might I complain?

● Transportation is the next element, with the price of gasoline a prominent factor.  A couple of days ago I filled my tank at $3.459 per gallon.  I searched my old receipts and found that a year ago, almost to the day, I gassed up at the same station at $2.839.  That’s a 21.8 percent differential.  It might be claimed that our current problems in the Near East create unusual circumstances, but the effect on cost-of-living cannot be denied.

● The final ingredient in the mix, medical expenses, can be a budget breaker for many a household.  Perhaps the most indicative straw in the wind, as to how the federal government truly views cost of living, is the Medicare Part B premium collected from seniors.  The 2006 monthly charge was $88.50.  In 2007 it went to $93.50—a boost of 5.65 percent.  How do you suppose they reconcile this to the 3.3 percent COLA?  But illusions aside, we cannot ignore the fact that health care is becoming this nation’s most pressing financial problem.  The National Business Group on Health recently released a report that national health care costs have risen 40.1 percent over the four-year period from 2003 to 2007.  This represents an annual increase of 10 percent.  Although the nation’s employers continue to foot much of the bill, they are steadily passing these higher costs on to their employees.  It’s clear that Americans will see their medical expenses escalate.  As the saying goes: We can run but we can’t hide.

That now gets us back to the original matter: How did the government select the COLA for 2006 to be 3.3 percent?  But, perhaps a more appropriate question should be why, not how.  Though I’m certainly an outsider—not privy to the inner workings and hidden mechanisms embraced by the Bureau of Labor Statistics—I sense a devious aroma wafting my way.  As it appears, the forces that direct our government’s policies, and the vested interests that buttress them, prefer that cost-of-living adjustments remain minimal.  Note that the CPI controls far more than social security benefits.  It is used to adjust for cost increases in various government and commerce programs, as well as to make inflation adjustments in wages and pensions, as well as business and union contracts.  Whatever number pops up will relate directly to the distribution of money to employees, pensioners, retirees, and various contractual recipients—the great unwashed middle class—and at an expense to those who control the apparatus.  With a smaller number, the distribution is appropriately reduced.  Does it seem unreasonable that the COLA may bear an inaccurate relationship to actual cost-of-living reality?  Of course, as to the computation method, how an unrealistically small number is arrived at is merely a detail.  If called upon, I could demonstrate that Osama bin Laden is deserving of a Nobel Peace Prize . . . provided I get to establish the criteria.

For a little perspective, we’ll delve into recent history.  Note below the annual cost-of-living adjustments assigned since the final COLA modifications in 1983.

                         Year       COLA        Year    COLA       Year    COLA

                         1983        3.5%         1991     3.7%         1999     2.5%

                         1984        3.5%         1992     3.0%         2000     3.5%

                         1985        3.1%         1993     2.6%         2001     2.6%

                         1986        1.3%         1994     2.8%         2002     1.4%

                         1987        4.2%         1995     2.6%         2003     2.1%

                         1988        4.0%         1996     2.9%         2004     2.7%

                         1989        4.7%         1997     2.1%         2005     4.1%

                         1990        5.4%         1998     1.3%         2006     3.3%

At about that time it began to dawn on our leaders that the Social Security System and its attendant Medicare program constituted, over the long haul, an economically unsustainable activity destined to bankrupt the nation.  Their approach to the dilemma—the suppression and denial of inflationary pressure—reflected the finest governmental tradition: If a problem does not lend itself to resolution, then postpone the inevitable until the safe retirement of those running the show.  Thus, during these past 24 years, the officially recognized increase in the cost of living averaged 3.0 percent annually.  That’s been the policy and so far obfuscation and chicanery continue to work . . . though the time of reckoning cannot be postponed indefinitely.  It’s becoming obvious that forevermore is shorter than before. 

This seems a fair time to ask a fundamental question: What percentage, over the years, represents an accurate annual cost-of-living adjustment?  I’ll approach this in the same way as before, with my personal experiences.

● In 1963 it cost 4 cents to mail a first class envelope.  The current price is 41 cents.  The average yearly increase, compounded annually, calculates out at 5.5 percent.

● Back in 1964, my wife and I rented a 2-bedroom apartment for $135 a month.  Today we rent similar units to our tenants for $1,450.  This represents an annual 5.7 percent raise.

● I recall purchasing a new 1972 full-sized Plymouth sedan for $2,900.  An equivalent 2007 auto sells for about $27,000.  We’re looking at an added 6.8 percent each year.

● A silk rep stripe necktie from Brooks Brothers cost $2.50 in 1963.  The same tie now sells for $69.50.  The fact that I still wear my 1963 ties doesn’t alter the reality of a 7.8 percent annual price increase.

● I’m an apple lover.  The Red Delicious from Washington that sold 3 pounds for a dollar in 1978 is now priced at $1.89 a pound.  That works out to a yearly 6.3 percent.

With my method, the average cost-of-living increase averages out over the past several decades at about 6.4 percent compounded annually, or essentially double the federal government’s official COLA.  You may challenge my sampling as not statistically adequate, but my approach is at least understandable.  That cannot be said for the official government figures. 

Having arrived at the end of my analysis, a summary is customary.  However, if you’ve paid attention, there’s really nothing to summarize.  Let me conclude with this simple observation: Fellow Americans, we are all being deceived, but there’s probably nothing that anyone can or will do about it.

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Al Jacobs has been an entrepreneur for forty years. His business experience ranges from property management and securities investment to appraisal, civil engineering, and the operation of a private trust company. In his book, Nobody's Fool - A Skeptic's Guide to Prosperity, Al presents his Ten Ground Rules for Success for achieving wealth and a prosperous life by outlining a philosophy for spending, borrowing, making sound investments, and how to avoid being victimized by America's many intimidating institutions.