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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 will continue.

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 products.

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 growth."

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 Mar/09.

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 @ _CNN Money_.

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 debtfreetoretire.com

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