For over a year now people have speculated as to when the Federal Reserve will begin to raise interest rates. Every time the Federal Reserve meets, the speculation heats up. Many of the so-called experts had predicted that September would see the rise in interest rates. That didn’t happen and as a result, the speculation is once again heating up as to what the Federal Reserve will do. As investors, the speculation is interesting and even somewhat entertaining, but we should not make decisions based upon it. The reason is that the government looks at thinks differently than you and I do.
Last week the Federal Reserve released its minutes for its September meeting. The Federal Reserve cited a variety of issues for its decision including the slow-down of the world economy. In addition, the Federal Reserve also mentioned that they were concerned about inflation. Not that inflation was too high but rather, their concern was the inflation was too low. The Federal Reserve has a target rate of about two percent for the inflation rate and as they pointed out, it is considerably lower and a concern to them. I bring this up because I think it is important to recognize the disconnect between government numbers and reality.
If I were to ask whether or not your cost of living has gone up substantially over the last few years, I believe the great majority of people would say yes. Every time I go grocery shopping it costs me more than the time before. In fact, when I look at independent surveys, the great majority of the American public believes that costs are rising at a healthy clip. If that is the case, how can the Federal Reserve be so far off?
When the Federal Reserve looks at the inflation rate, they are not looking at the same things as you and I. Therefore, when the Federal Reserve says that inflation is one to one and one-half percent, we can’t assume that it applies to our own individual family situation. We all know that our cost of living is going up much faster than one to one and-one half percent. There is a disconnect with government numbers and it is important that we recognize that. Government numbers such as the inflation rate are meant for economists, not for people like you and me. After all, if you assume that the government’s inflation rate of one to one and one-half percent applies to you, and in the reality your increased cost of living is more like three to four percent, it can cause you severe problems in the future.
Do I believe our government is evil – of course not. However, it is important for all of us to recognize that when the government reports official numbers such as inflation, it is not meant to apply to our own individual situation. When it comes to our own increased cost of living, the only way that you can determine what your individual cost of living is, is to keep track of your expenses and compare them year to year. That will give you a good idea of what your increased cost of living is and I would suggest it’s a lot different than the official government inflation rate.
What the Federal Reserve does with interest rates and when, is important and will have an impact on all of us. However, never forget that what will have more of an impact on you is to base your financial decisions on your own individual financial situation and not what is happening with interest rates or the stock market.
Good luck!
Rick is a fee-only financial advisor. His website is www.bloomassetmanagement.com. If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com.