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With the Current Inflation Rate, the Devil is in the Details

Working class Americans don’t need a reminder to know that inflation has been hard at work behind the scenes the past few years, working feverishly to undermine the value of the dollars they bring home. No one realizes this more than emergency responders, who put their lives on the line each time they shrug into a uniform and head out the door to perform another shift in service of the public.

How bad is inflation? The following quote from the National Inflation Association offers some insight.

“The U.S. Bureau of Labor Statistics (BLS) yesterday released their consumer price index (CPI) data for the month of July. The BLS reported an increase in year-over-year CPI growth to 3.63%, the highest rate of U.S. price inflation since October of 2008. July’s official government reported year-over-year U.S. price inflation rate of 3.63% was up from 3.56% in June, 3.57% in May, 3.16% in April, 2.68% in March, 2.11% in February, 1.63% in January, 1.5% in December, and 1.1% in November.

The official rate of U.S. price inflation has increased by 230% over the last eight months. NIA conservatively projects the official rate of U.S. price inflation to surpass 4% by year-end and 5% in early 2012. NIA estimates the real rate of U.S. price inflation, without geometric weighting and hedonics, to currently be approaching 8%. NIA projects the real rate of U.S. price inflation to reach double-digit territory by mid-2012, if not much sooner.

Gold prices today reached a new all time high of $1,877 per ounce. Gold is the best gauge of inflation, not the CPI. On June 15th when the BLS reported May CPI data, gold was trading for only $1,520 per ounce. Even though the BLS reported a year-over-year CPI increase for the month of May of 3.16%, the mainstream media reported that inflation was slowing down and not a problem because gas prices were declining. Although seasonal adjusted gas prices in the month of May were down 2%, NIA reported to you that non-adjusted gas prices actually rose 3.6%. NIA then warned you that the BLS’s seasonal adjustments will reverse beginning in the month of July and start boosting reported gas prices.

NIA was right, seasonal adjusted gas prices in the month of July increased 4.7%. The mainstream media intentionally misled Americans about price inflation during the month of June, but the world is now recognizing the truth about how U.S. price inflation is spiraling out of control with the price of gold having risen 23% since mid-June. The investment community is also finally realizing what NIA has been saying for years, inflation does not create real economic growth.”

So there you have it. Inflation is bad and there’s nothing in the near term to make us think it’s going to get any better. The gas and food prices you pay are an obvious indicator, but there is another deteriorating asset you might not have considered – your pension. Inflation erodes the value of all dollar-based assets: stocks, bonds, mutual funds. If your pension plan invests in such things, and most do, the lowered purchasing power available to you during retirement might come as a nasty surprise.

If this is your first time thinking about such things, it’s sometimes difficult to initially wrap your mind around the idea that holding debt is the way to profit from inflation. This is not to suggest you immediately max out your credit cards. We’re not talking about that kind of debt. You need a specific kind of debt in the form of a long term, fixed rate mortgage attached to an income generating piece property. In short, you need to become a landlord to have a chance to live the type of retirement you’ve dreamed about.

Here’s how inflation helps you profit as a mortgage holder. The dollars you borrowed today will be worth less at the end of the loan term, say in about 30 years. How much less? If you stick with the historical rate of inflation, even the government sanctioned numbers dictate your loan balance will decline in terms of real spending power at the rate of about 4% annually. That $100,000 balance will seem like $96,000 at the end of the first year, even if you do nothing but pay interest. At the end of the second year your balance will be down to $92,160.

That, ladies and gentleman, is how you profit during inflationary times. And don’t worry too much about leaving your banker holding the bag. They make those loans willingly and can always invent a fee or two to make it worth their while.

The concept we have just laid out is how real wealth is created in America.

The Heroic Investing Team







(Flickr / peretzp)


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