Why can't Alan Greenspan just relax? Everyone knows inflation is tame, recently running about 2. 5 percent a year. But the Federal Reserve...
Why can’t Alan Greenspan just relax?
Everyone knows inflation is tame, recently running about 2.5 percent a year. But the Federal Reserve Board chairman told Congress recently that he intends to keep raising interest rates anyway.
If you were around for the double-digit inflation of 1974 and 1979-81, as Greenspan was, you know how much rising prices can hurt. But inflation has been below 3 percent every year since 1992, except for the 3.4 percent of 2000. So what’s the big deal?
Partly, it’s that Greenspan knows it’s less painful to nip inflation in the bud than to reverse it after it has taken root.
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Also, the broad numbers don’t tell the whole story. Like a forest fire, inflation can ignite from a few hot spots, and Greenspan doesn’t want to blow his stunning inflation-fighting record before leaving office in January.
Because we each spend money differently from our neighbors, some of us feel inflation’s sting even if the broad numbers are benign.
College costs tend to rise at double the overall inflation rate. Prices for housing, health care, gasoline and heating oil have been soaring.
These may be offset by plunging prices for computers, flat-screen TVs and clothes from low-wage countries. But that is small consolation if you’re driving your college-bound offspring around in a sport-utility vehicle and your boss is cutting health coverage.
To gauge inflation’s effect, use the Rule of 72. Divide 72 by the inflation rate to find out how long it will take prices to double. At 3 percent, it will take 24 years; at 6 percent, just 12 years.
In recent years, some public universities have raised tuition by 10 to 12 percent a year. If that continued, the price of a college education could double in six years.
Though we can hope that Greenspan and his successors will battle overall inflation effectively, we each need to fight our personal inflation demon.
With expenses, the strategy is plain: Don’t drive a gas guzzler, improve the attic insulation and offset the rising price of necessities by cutting frills.
As a renter, you can bet your housing costs will rise each year. But if you buy a house with a fixed-rate mortgage, the biggest part of your housing cost — principal and interest payments — will be immune from even the worst inflation.
Medical costs are nearly impossible to control. But good health coverage should be a priority in job hunting, and it may pay to keep working until you turn 65 and are eligible for Medicare. Also, look into a health savings account if your employer offers it. Those provide a tax break to people who save for health-care expenses.
The surest way to arrest inflation in college tuition is to put money into a prepaid-tuition program offered by many state-run “529” college savings plans. That way, you pay for college at today’s prices and avoid future increases.
It also makes sense to select investments that can grow faster than inflation. The most obvious are those that guarantee inflation-beating returns, such as Treasury inflation-protected securities, inflation-indexed corporate bonds and inflation-indexed U.S. savings bonds.
Over long periods, stocks, though riskier, do even better at beating inflation.
We each have our own inflation issues, so I can’t tell you exactly what to do. But take a cue from Greenspan: Don’t let modest overall numbers leave you thinking inflation is nothing to worry about.