by MIKAEL JACOBS, PARTNER
To first clarify cause and effect, inflation reduces our purchasing power. And due to the steady rising of inflation, the power of currency continues to decline. In other words, during high-inflationary periods we can buy less with our money.
What does this mean for you? Well, your investment portfolio may need some rebalancing. And if you don’t feel confident with your current retirement savings, a CERTIFIED FINANCIAL PLANNER™ can assist.
You always have the opportunity to refocus your direction. Where do you want to go?
So, what is the relationship between the cost of living and purchasing power?
For the United States, the calculated purchasing power index is based on a value of 100. Any higher and you can afford more – based on the cost of living in relation to income. Any lower, and you are technically less wealthy.
For Tennessee residents, that’s good news since the cost of living is 87.6. Keep reading for more details.
Why is Inflation Rising?
To expound on cause and effect, your trusted financial advisors in Brentwood, TN agree that the reopening of the economy in 2021 (due to COVID), supply chain disruptions, and bottleneck consumer demand for goods, have generated elevated inflation. Trying to fill the economic void and synchronize global recovery, government spending and/or policy could also play a role.
What is the Current Cost of Living?
In 2021 Tennessee was reported by the World Population Review to be the country's sixth most affordable state in which to live. Keep in mind, while Tennessee has no state income tax, it does have a 7% statewide sales tax.
As mentioned, Tennessee is at 87.6 cost of living index as of March 2022. Again, an amount under 100 means your state is cheaper than the national average; over 100 means it is more expensive.
Using the Consumer Price Index (CPI) and differing salaries from over 300 major cities in the U.S. this Cost of Living Calculator can quickly compare the cost of living in your current location to a new location.
This Cost of Living Chart shows how your state breaks down into these categories, in comparison to national levels. Here are cost of living numbers for Tennessee:
- Grocery: 95.4
- Health: 101.9
- Housing: 71.2
- Median Home Cost: $231,600
- Utilities: 96.7
- Transportation: 90.2
- Miscellaneous: 95
Are your wages, investments, and savings affording you comfortable living through high inflation? If you think there is room for improvement, seek investment management services in Brentwood, TN.
Why the Decline in Purchasing Power?
As touched on, we lose purchasing power when prices increase. We gain it when prices decrease. Causes of declined purchasing power include:
- Inflation
- Government regulations
- Natural disasters
- Geo-political turmoil
The Federal Reserve (Central Bank) is working hard to stabilize the economy to help us regain purchasing power. If we compare the current (2022) inflation rate of 7.5% to last year (2021) we can estimate that (if this number holds), $1 now will be equivalent to $1.07 in purchasing power next year (2023).
How to Calculate Purchasing Power
- Collect CPI data you want to use from the Bureau of Labor Statistics
- Divide the earlier year by the later year (in this case Jan 1975 (38.8) by Jan 2018 (247.9)
- Multiply by 100 to derive the CPI change during that period
- (38.8 / 247.9) x 100 = 15.7%
- Take this CPI derivation and subtract it from 100 to get the % change
- 100 - 15.7 = 84.3%
You can also use this interactive CPI Inflation Calculator to compare inflation amounts.
How Much are Goods and Services?
From housing costs and property taxes to insurance products and gas prices, higher inflation is expected for months to come.
According to a recent Consumer Price Index (CPI) report, prices rose 7.5% in January 2022, compared to 2021. This is the most significant annualized growth in CPI inflation since February of 1982. Core CPI (volatile food and energy prices) alone rose by 0.6% in January of 2022 and climbed by 6.0% over 12 months – the largest gain since August of 1982.
Consumer confidence ratings are low. Buyers from all tax brackets are feeling the pinch. And while wages are gaining, they’re not keeping up with overall prices. Inflation-adjusted earnings dropped 1.7% compared to February 2021. Therefore, typical workers now have less buying power.
The Consumer Price Index for All Urban Consumers (CPI-U) rose 7.5% over a one-year period from January 2021 to 2022. The top 20 price increases of goods and services include (in terms of percent change between JAN 2021 – JAN 2022):
- Fuel oil: 46.5%
- Used cars and trucks: 40.5%
- Motor fuel: 40%
- Gasoline (all types): 40%
- Energy commodities: 39.9%
- Energy: 27%
- Utility (piped) gas service: 23.9%
- Energy services: 13.6%
- New vehicles: 12.2%
- Meats, poultry, fish, eggs: 12.2%
- Electricity: 10.7%
- Food at home: 7.4%
- Food: 7%
- Tobacco/smoking products: 7%
- Cereals/bakery products: 6.8%
- Food away from home: 6.4%
- Transportation services: 5.6%
- Fruits and vegetables: 5.6
- Nonalcoholic beverages and beverage materials: 5.0%
- Apparel: 5.3%
Note: This data is not seasonally adjusted. Source: U.S. BUREAU OF LABOR STATISTICS
Should Retirees Worry About Purchasing Power?
We will not tell you to worry, but we will advise you to plan. On the list of retirement risks for retirees, purchasing power is near the top. Even when inflation runs low – seniors are more likely to require higher-costing services such as healthcare.
According to research from LIMRA Secure Retirement Institute, they show the effect inflation could have on the average Social Security benefit over 20 years. A 1% inflation rate could eat $34,406 of retirees’ benefits. If inflation increases to 3%, the deficiency would total over $117,000.
And even though Social Security’s Cost-of-Living Adjustment (COLA) was built to provide annual increases in benefits, retirees are worried about the inadequate calculations.
Talk to a Financial Planner near you about inflation proofing your retirement plans.
Next Steps
Examine your unique impacts of inflation and the potential risks that come with retirement. Work with our wealth management firm that specializes in working with pre-retirees and retirees. In developing a written plan that alleviates risks, you can feel safer as you strive to achieve your financial and life goals.
View our case studies to meet some of our clients.
Explore our website and resources.
Schedule your complimentary appointment.
Read our eBook: Are You Ready to Retire… Or Are You?
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