NEW YORK ( TheStreet ) -- Inflation is actually much higher than what the BLS claims it is; something that purchasers of college tuition, pharmaceuticals, or health insurance know all too well.
To give the BLS some credit, they must try and estimate a single rate of inflation that applies to everyone equally. But that is a completely impossible task. An octogenarian living in Seattle on a meager pension and taking lots of prescription medications will have a totally different inflation experience than an 18-year old, living in their parent's basement, eating Ramen noodles. But even after spotting the BLS some slack, there are some enormous and glaring errors in their methods that render the official inflation measure hopelessly -- and dangerously -- inaccurate. In this article, I am going to reveal how U.S. inflation numbers are badly understated, how this practice short-changes institutions and fixed-income individuals alike, and why this means fiscal and inflationary train-wrecks are the most probable outcome for the U.S. -- and, by extension, the globe.
Why This Is Important
As a refresher, inflation in the U.S. is calculated by the Bureau of Labor Statistics (BLS) in a measure called the Consumer Price Index, or CPI. It is used by the Federal Reserve to justify its money printing policies, by the federal government to calculate cost-of-living adjustments (COLA) for the entitlement programs (e.g., Social Security), and to set the interest rate on inflation-adjusted bonds known as TIPS. Indirectly, the CPI influences interest rates, the stock market, and a host of salary and pension negotiations each year. If the CPI is too low, even by a single percent, the impact is in hundreds of billions of dollars. And from a financial planning standpoint, the impact is just as dire. If you are putting away money for a child for college, the rate of inflation you apply to the tuition has an enormous impact on the amounts you'd need to put away. In 18 years, a current $40,000/year tuition will become $66,000/year at a 3% rate of inflation, but $107,000/year at a 6% rate of inflation. The same logic and results apply to retirement planning. Further, the cost estimates surrounding the current health-care debate in the U.S. are founded on inflation projections that draw upon prior CPI readings for their baselines.