There are Many Ways to Count Inflation:
What should a Retiree do?
As it is, there are really three major measures of inflation.
The most commonly quoted of these is the Consumer Price Index (CPI).
There is the “Headline” CPI which measures the cost of living and includes commonly purchased goods and services, variously weighted, and is said to be representative of the spending habits of the general population.
Then there is the Underlying CPI. This figure is used by the Reserve Bank in its deliberations about monetary policy and interest rates.
The difference between the Underlying CPI and the CPI is that the Underlying CPI takes out food prices and energy prices, on the theory that these both move rapidly up and down and do not actually provide an accurate picture, at least over the shorter term, of long-term price trends.
The Reserve Bank’s aim is to keep the Underlying Inflation Rate at less than 3% - hence the precautionary interest rate rises that we experienced earlier this year.
For the average Australian, the notion that the cost of living has only risen by 3% since this time last year sounds ludicrous.
That’s because they are going into the supermarket and to the petrol pump almost daily and see the prices rising.
Retirees present a special case when it comes to inflation.
The biggest factor that is different for retirees is that they tend to spend a much greater percentage of their annual budget on health care. Medicare rarely covers all of the medical bills of many elderly Australians.
There are things that no insurance can cover: in-home care, nursing home care, the cost borne by children who have to come and help out, trips to the doctor, walking frames, motorized wheel chairs for those unable to walk, alterations to the family home such as ramps, building in suitable accommodation and bathroom facilities downstairs etc.
Medical costs rise at roughly double the rate of the CPI each year. Last year (2012) the official inflation rate was just over 2%. Private health insurance costs rose by close to 5%.
It is true that medical costs are part of the market-basket of goods and services factored into both Headline and Underlying CPI.
That doesn't help if you are elderly and your medical care costs form a much bigger part of your budget.
Your challenge is to ensure the sustainability of your retirement income for life – including Silver Inflation, the new and increasingly important third category of inflation.
Incidentally:
There is a "fourth" inflation measure that should be getting a lot of attention.
This measure accounts for a common behaviour in consumers.
It is a fact that when faced with higher prices for goods and services, many turn to cheaper versions of the same thing. Quality may go down, and what the consumer actually spends is less.
For example: if beef prices rise, many consumers will turn to cheaper cuts of beef or to pork or chicken instead. If the price of cars rise, many people will buy smaller cars or second hand vehicles. When food prices rise broadly, consumers will forgo name brand products and buy store brands. People will opt for the generic brand of prescribed medicines when previously they always bought only the pharmaceutical brand name recommended on their doctor's prescription.
How a change in the price of a commodity or service affects purchasing behaviour (particularly in the case of retirees or people on a fixed income) is the subject of what is termed in some overseas countries, "Retiree CPI".
