On Consumerism: Inflation, now and past: Part I

In supermarkets today, customers grumble — often to the cashiers — about how much more they are paying even though they are buying the same items as in the past. This is one example of inflation.

Basically, inflation is the increase in prices today for merchandise you bought at lower prices in the past. Think of it as the cost of living going up.

Inflation means your paycheck, pension, or Social Security check, if it remains the same amount, gives you less and less buying power each month.

Inflation is the reason that, beginning in 1975, the Social Security Administration began automatically adjusting payouts every year to reflect increases in the cost of living. Prior to 1975, payouts were adjusted only sporadically, each adjustment reliant on an action of Congress.

Inflation is in the news because it was high in 2021, at roughly 7 percent. I say “roughly” because the experts who measure it seldom agree on precise numbers.

For comparison, the U.S. Labor Department pegged inflation for 2019 at 2.3 percent.

Historically, the nation’s inflation rate seldom tops 4 percent per year.

The Federal Reserve fights inflation by raising the prime lending rate, a nationwide benchmark. This makes it more expensive to borrow money, which leads to less demand for credit, money, and supplies; this reduced demand leads to a slowdown in the rising costs.

The Fed will raise interest rates this year, though we don’t know yet by how much.

The high inflation we had in 2021 is not cause for panic. But high inflation rates, when sustained, are very painful and hurt nearly everyone.

Our longest period of sustained high inflation rates was the late 1970s. (More specifics in next week’s column.)

It required a massive raising of interest rates by the Paul Volcker-led Fed in 1981 to tamp out the inflation fire of the 1970s. This also led to a 1980-1982 recession, but many of us who lived through that period of rising prices believe the recession was a small price to pay for ending the inflation cycle.

What can we expect from the forthcoming higher interest rates?

Credit cards will charge you more interest on outstanding balances. Banks, and credit unions will charge you more interest on newly sought loans. So will automobile makers — though you’re often better off getting your car loan elsewhere.

If you have a loan or mortgage with an adjustable rate — not a flat rate — it will likely start charging you more interest.

Usually the price of gold (and silver and platinum) will go up.

Eventually, banks will raise the interest rates they pay on savings and checking accounts.

Interest earned on today’s bank accounts are about one-twentieth of 1 percent. How minuscule. Any money you deposit won’t grow by any noticeable amount.

For the sake of savers, I would love to see interest rates go up. I recall the early 1980s when savings accounts received about 15 percent interest per year, and certificates of deposit (CDs) garnered 18 percent annually.

That was a consequence of out-of-control inflation.

But today’s inflation — which is still relatively mild — doesn’t offer us consumers any easy options for “keeping up.”

The only certain way to keep pace with inflation is through the federal government’s Series I savings bonds. These bonds, launched in the late 1990s, are linked to the consumer price index and gain value in accordance with the rise in the cost of living. They’re offered in denominations ranging from $10 to $10,000. A savings bond can be redeemed only by its owner, so it’s pretty much theft-proof..

In June 2002, I bought a $1,000 I bond. I had received a nice bonus at work and didn’t want to squander it on anything not truly needed. So I bought the bond, which has a picture of Albert Einstein on it, and tucked it out of sight.

Now, nearly 20 years later, that $1,000 bond can be redeemed at any bank for $2,264.40 — the amount is adjusted each month. Because the bond was squirreled away, I was never tempted to spend it.

It’s no longer easy to buy paper bonds. A buyer used to give the paperwork and money to a bank, and later the government would mail the bond. But now one has to buy through a website. And (with the exception of bonds bought with income-tax refunds) the bonds are no longer issued on paper.

Too bad. When one’s bond is “digital” and can be redeemed with the click of a button, one is far less likely to hold onto the bond and let it grow.

We all would be better off with a Series I savings bond tucked away for future decades.

Arthur Vidro is one of the Eagle Times’ recurring financial columnists.