Blogs > Your Money

Dave Patterson and Erin Preston, a father-daughter team of Certified Financial Planner® licensees, provide thoughts and suggestions on a broad collection of personal finance topics.  Information provided in this BLOG is intended to be of a general nature and may not be appropriate for all situations.  Readers should consult with their own financial advisors before relying on any information contained herein.

Friday, February 25, 2011

Will Inflation Soon Be Rearing Its Ugly Head?

Senior citizens have been complaining that they haven’t received an increase in their Social Security checks for two years now. The good news is that it may not be too long before they will see an increase. The bad news is it may not be too long before they’ll receive an increase. Keep reading to see why it’s also bad news.

As most people know, Social Security increases are tied to the rate of inflation. Inflation has been very low the last two years, so there haven’t been any bumps in Social Security benefits. However, many feel that the way inflation is calculated for Social Security purposes, doesn’t accurately reflect the true impact of inflation. For example, used car prices are used instead of new car prices. Rental costs are used for housing instead of actual house prices. Therefore, Social Security increases may well not be in line with the actual increase in prices.

If inflation goes up enough in the near future, seniors may again see an increase in their Social Security Benefits. At the same time however, the cost of living may go up more than the increased benefits.

With all the money the government has been dumping into the economy, we’ve been worried that inflation would soon begin to take off. The unrest in the Middle East has caused turmoil in the stock market and we are reading every day about rising food prices.

Yet even with these signs of renewed inflation, there are some who are saying that inflation will be modest going forward. At the time of this writing (February 24, 2011), an article by David Wessel was published in the Wall Street Journal titled ‘Tinker Bell’ Economics Colors Inflation Predictions . The article discussed the theory that inflation is caused in part by the expectations people have about inflation. The article stated that Ben Bernanke, Federal Reserve Chairman, ”says that it’s hard to sustain inflation with so many people out of work and so many offices, stores and factories empty.” It went on to say that Mr. Bernanke sees no big rise in inflation expectations.

We hope Mr. Bernanke is right. If not, you might want to consider including Treasury Inflation Protected Securities (TIPS) and some commodities in your portfolio.


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