A Better Inflation Gauge Shows Why Inflation's Much Worse

Better Inflation Gauge Shows Why Inflation's Much Worse
Better Inflation Gauge Shows Why Inflation's Much Worse

Plunging home values and swinging stock markets have hit Americans' finances hard. But a much bigger threat to your long-term financial health is inflation, which slowly but surely destroys the purchasing power of your hard-earned money.

Since things like Social Security benefits are pegged to inflation rates, it's important for the government to measure it accurately. Unfortunately, gauges like the Consumer Price Index don't always reflect economic reality for ordinary Americans.

That's why one organization wants to create a more accurate inflation yardstick.

The American Institute for Economic Research recently published its latest findings on its Everyday Price Index, which it argues is a better way to measure inflation than the CPI.

By looking at how people change the mix of products they buy over time in response to price movements and other factors, the AIER says, the EPI gives a much more realistic picture of what you actually pay for the things you buy.

According to its latest revised figures, the everyday price index rose 8% in 2011. That's much higher than the 3.1% increase in the CPI, as price hikes for gasoline and food played a much bigger role in the EPI's rise.

A Widening Gap Between CPI and Reality

When the AIER looked back at the last 25 years, however, it found an even more alarming trend: Until around 2002, the CPI and the Everyday Price Index tracked each other fairly closely. But over the past decade or so, the CPI has risen much more slowly than the EPI.

Sponsored Links

One key reason, the AIER says, has to do with technology products such as computers, smartphones and TVs. While prices for these products are factored into the CPI, AIER ignores them in calculating its inflation index because they aren't everyday purchases. Moreover, the CPI methodology incorporates adjustments for technological advances that further depress reported price increases.

Of course, no two people are alike in what they buy, so the inflation you'll see will be a bit different from that affecting someone else. But everyone has to look at the prices they pay in order make sure the money they save and invest will be enough to let them live comfortably in retirement. If you don't, inflation could take a bigger bite out of your savings than you think.

More on inflation and retirement: