Wednesday, August 29, 2012

Inflation: The Silent Tax

Inflation is a silent tax. It can usurp the purchasing power of goods and services by reducing the value of the currency. Currently, the CPI(Consumer Price Index) is one way of measuring inflation. There is a debate if this is an accurate way of measuring inflation since it does not include many goods that are purchased by individuals. This is an important topic for people that are investors, saving for retirement, college education, etc. As a long term investor, it is a must that your retirement savings outpaces inflation.

The article titled, "Why Investors see Low Inflation for 10 years" is an interesting article. The author cites the current low CPI as a rationale of low inflation. However, readers of this blog would notice the huge flaw in this argument. Food prices are high, commodity prices are high, Precious metals are also higher, but there is no inflation? Inflation does not make all prices rise at the same time, but rather certain segments rise at a different rate than others. Some market segments go downward in price. To imply there is low inflation is a fallacious argument based the fact that CPI does not include all items in the calculation of inflation.  It is economic impossible not to have some inflation after having an aggressive monetary policy with low interest rates, and an intrepid fiscal governmental policy with record levels of spending and borrowing.

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