Gas Prices and the Impact of Inflation

Year Item Price Rate of Inflation 03/80 Gasoline (per gallon) 1.252 03/05 Gasoline (per gallon) 2.065 2.02%

03/80 Bread, white, per lb 0.502 03/05 Bread, white, per lb 1.002 2.80%

03/80 Consumer Price Index 80.10 03/05 Consumer Price Index 193.30 3.59%

Source: U.S. Department of Labor - Bureau of Labor Statistics (www.bls.gov)

What is Inflation?

Inflation is an indication of the rising cost of goods and services in the economy. For example, a gallon of regular unleaded gasoline was 1.252 in March of 1980. Comparatively, that same gallon was priced at 2.065 in March of 2005. Therefore, over the last 25 years, the cost of a gallon of gas has increased at an average annual rate of inflation of 2.02%. As another example, during the same 25 year period, the price of white bread increased at an annual rate of 2.80%.

The Consumer Price Index (CPI) is widely accepted as the measurement of general inflation in the United States. The CPI is calculated monthly by the U.S. Department of Labor - Bureau of Labor Statistics. It is an index based on the cost of items in more than 200 categories. They include: breakfast cereal, milk, wine, bedroom furniture, men's shirts and sweaters, jewelry, physicians' services, televisions, sports equipment, college tuition, postage, and haircuts.

Simply stated, the CPI tells us the average change over time in the cost of goods and services. From March 1980 to March 2005, the inflation of general goods and services averaged 3.59% annually.

How is Inflation Relevant?

Inflation has an impact on our plans for the future. When saving for retirement, college, a house, or simply budgeting for the next 12 months, the cost of goods and services have a direct impact on your goals. Due to inflation, your goals may cost more in the future than today. A meal that costs $10 today may cost $10.36 in one year. A car that costs $10,000 today may cost $10,359 in one year, and almost $12,000 in only 5 years. So, when planning for the future, you must consider inflation and the effect it may have on your goals.

Ways to Combat Inflation

One way to overcome prices that may rise due to inflation is to make your money grow at a rate higher than inflation. For example, if inflation is 3.59% annually, you will need to make your money grow at 3.60% or higher. Otherwise, though you may be saving and investing toward your goals, you may never actually achieve them.

Many investments provide a vehicle for "outpacing" inflation. Generally, stocks and bonds have historically earned an annual rate above inflation. Through careful planning and investing, it is possible to overcome inflation and its impact on prices.

In summary, a plan that does not account for inflation is in danger of failing. Therefore, it is important to remember inflation and invest in assets that will enable you to achieve your goals despite the effects inflation may have on the cost of goods and services.

Jonathan Citrin provides financial goal planning services. Go to articles.citringroup.com for hundreds of educational articles about Personal Finance, Retirement Planning,Investment Planning, and College Savings.