The Effect of Inflation and Deflation on Retirees
When we worry about how long our retirement income will last, we
consider so many factors. The current economy is causing a drain
on 401(k)'s and IRA's. So we have become much more cautious
about withdrawing money to use it as part of our pensions. Now we
are limited to living within the Social Security benefits of
those 65 and older. Social Security is in the process of being
changed to stop the cost of living benefits for the next couple
of years, as well.
The Dow Jones continues to fluctuate between 9200 and 9500 for
almost all of 2009, so it will be difficult to feel confident
that we will be accessing our savings for any big ticket items
like a new car or vacations within the near future. The
unemployment rate is over 9% and still rising. This emphasizes
the concern that the country is not really coming out of the
recession as is being argued by many economists.
As my friends and I discussed the impact of inflation I wonder if
the inflation level will rise from the 3% that I routinely use to
determine the growth of liabilities and consumer goods for my
clients, as I help them with their retirement planning.
I ask myself should I start using 4% as a better indicator of the
amount of savings my clients will need at retirement? As a result
I went on to Google and entered "current inflation rate" and
what I found was very surprising and worthwhile discussing for
all of us trying to make sense of the economy.
While all of us have heard about inflation and recognize that
when it occurs it could cause problems for us, personally. What
we may not have is an easy definition that describes inflation as
occurring when money becomes relatively less valuable than goods.
Knowing this I expected to see inflation rising over the past few
months but instead, since March, 2009 our economy has been in
continued periods of deflation. September's number will be due
out on October 15^th and it is likely that the trend of deflation
So now I went back to Google and asked what causes deflation? **
According to Kimberly Amadeo of _About.com_ deflation is defined
as the time that "asset and consumer prices continue to fall."
This may seem like a great thing to consumers, because it may
seem a positive concept that consumer prices are becoming more
affordable, except that the cause for deflation is a long-term
drop in demand.
Unfortunately as Ms. Amadeo continues, "a drop in demand means
that a recession is already underway, with job losses, declining
wages, and an ongoing decline in the value of your home and your
stock portfolio. Deflation is a result of businesses dropping
prices in a desperate attempt to get people to buy their
Officially, deflation is measured by a decrease in the Consumer
price index. However the index does not measure stock prices
which retirees use to fund purchases and businesses use to fund
Can Anything Be Done About Deflation?
Google.com has become my research source. In seeking the answer
to the prevention and possibly a cure for deflation many
interesting perspectives were presented. The table presented on
_Inflation Data.com_ shows the drop in the inflation rate in
Dec./08 and continuing into Jan. and Feb./09 and the subsequent
rate of deflation often linked to recessions, that started in
Inflation is defined in the _Merriam Webster Dictionary_ as a
continuing rise in the general prices due to an increase in the
volume of money and credit with less goods and services available
for purchase. Deflation seems to be caused by a long term drop in
demand for goods. Of course this is only a part of the story. We
need to ask ourselves why is there a drop in demand for goods?
Mike Moffatt writing on "What is Deflation and How Can It Be
Prevented" @ _About._com. gives us further insights. Mike quotes
Colin Asher speaking to _Radio Free Europe_, and Mark Gongloff @
Colin Asher, an economist at Nomura Securities, told _Radio Free
Europe_ that the problem with deflation is that "in deflation
[there's] a declining spiral. Businesses make less profits so
they cut back [on] employment. People feel less like spending
money. Businesses then don't make any profits and everything
works itself into a declining spiral." Deflation also has a
psychological element as it "becomes rooted in peoples'
psychologies and becomes self-perpetuating. Consumers are
discouraged from buying expensive items like automobiles or homes
because they know those things will be cheaper in the future."
Mark Gongloff at _CNN Money_ agrees with these opinions. Gongloff
explains that "when prices fall simply because people have no
desire to buy -- leading to a vicious cycle of consumers
postponing spending because they believe prices will fall further
-- then businesses can't make a profit or pay off their debts,
leading them to cut production and workers, leading to lower
demand for goods, which leads to even lower prices."
So the recession is the fault of the consumer? Or could it be
caused by the continued increase in printing money whenever the
government needs more for its own special use. Glen Beck @
Glenbeck.com displayed a graph that outlines the spending that
has taken place in America. In 1971 President Nixon decided to
stop using the gold standard to back our money. Over the ensuing
years the outpouring of printed money being pumped into the
economy will so devalue our dollar as to be almost worthless.
The consumer anxiety is this. We are concerned about the effect
of inflation and deflation on our lifestyles. We are concerned
about the level of our retirement funds and the slow return to
the pre-October 2008 level. What if we continue to withdraw funds
to augment our Social Security or pensions and the recession
finally ends after we have drained our savings. As the economy
surges forward the young, with jobs, will need to start over and
the elderly on fixed incomes, can become greeters.
We are also, concerned about the continued recession no matter
that many economists say the US economy is finally coming out of
the recession. Look at the numbers and decide for yourself. We
are still seeing unreasonable growth in unemployment numbers and
fewer new jobs being developed except in bigger government or in
lower paying homecare fields.
What is the answer? The job of preventing recessions over the
past few years lies with the Federal Reserve Bank and the Federal
Government. Decreasing the interest rates has helped to increase
the supply of money into the economy. Lowering interest rates has
worked in the past but now the interest rates are already low and
the feds hesitate to cut the rates further.
The government can help by putting more money into the economy by
lowering taxes and increasing government spending with a
temporary deficit. The government is already printing money for
many new ideas such as the stimulus package for AIG and loaning
money to the banks and the auto industry thus causing a real
deficit, not a temporary one.
Why not lower taxes? This would benefit the common people not
only the banks and corporations. Why not beg the feds to print
more money to be used to buy bonds to decrease our interest
rates? Is it such a big deal to cut the rate by 1/8^th of a
percent to help the economy? The feds have usually lowered the
rates by 1/4% or greater.
Last quarter the feds decided against cutting the interest rate.
When economists talk about "printing more money" and "the Fed
lowering interest rates" they're talking about the same thing.
The Government is printing money but not reducing taxes or
lowering interest rates. While already low, there is still room
to lower them further, so using this policy to fight deflation
will support growth in the economy.
Irene A. Majchrzak helps people retire debt-free with a sense
of well-being and the freedom to have the things they want.
Get her free ebook, Debt Free to Retire, by going to