U.S. Consumer Prices Jumped in June by the Most in 26 Years
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Prices increased 5 percent in the 12 months to June, the most since May 1991. They were forecast to climb 4.5 percent from a year earlier, according to the survey median. The core rate increased 2.4 percent from June 2007, also more than forecast.
Energy expenses jumped 6.6 percent, the biggest gain since the aftermath of Hurricane Katrina in September 2005. Gasoline prices soared 10.1 and fuel oil jumped 10.4 percent.
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Rents which, make up almost 40 percent of the core CPI, also accelerated. A category designed to track rental prices rose 0.3 percent after a 0.1 percent gain in May. Today’s figures also showed wages decreased 0.9 percent in June after adjusting for inflation, the biggest drop since August 1984, and were down 2.4 percent over the last 12 months. The drop in buying power is one reason economists forecast consumer spending will slow.
The continued increase of inflation is a serious problem. Eventually the federal reserve needs to take serious action (raising the discount rate). And the politicians need to stop raising taxes on the future to spend more and more every year. Their continued financial irresponsibility is a large part of the reason for the declining value of the dollar – along with the voters that keep electing those proposing large increases in spending while pushing off paying for that spending to future tax increases.
Related: inflation investment risk – Food Price Inflation is Quite High – Bernanke warns of inflation – Politicians Again Raising Taxes On Your Children – USA Federal Debt Now $516,348 Per Household
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Many Retirees Face Prospect of Outliving Savings, Study Says
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Middle-income Americans entering retirement now will have to reduce their standard of living by an average of 24 percent to minimize their chances of outliving their financial assets, the study found. Workers seven years from retirement will have to cut their spending by even more — 37 percent.
This is one more study pointing out how many people are failing to take the most basic steps to manage their finances. Saving for Retirement is not very complicated. The details can get a bit complex but some of it is really basic like saving at least 5-15% of your earnings each year (or more if you fall behind) in tax differed savings accounts (IRA, 401(k)…). Many people just choose to sacrifice their future to buy more toys today.
There are different strategies but the minimum you should be doing (in the USA where social security will provide a portion of retirement savings) is saving, in a 401k, IRA or something similar: 5% in your 20s, 8% in 30s, 10% in your 40s, 11% in your 50s, 12% in your 60s. If you save more earlier you may be able to save less later. And if you fall behind you will have to save more. To retire earlier, than say 68 (today, or say 70 by 2020, and if you assume life expectancy rates will continue to increase you need to plan on working longer or saving more for a longer retirement), you should save more.
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I commented on, WaMu Free Checking: The High 3.3% APY May Be Worth A Look, yesterday:
I agree it is worth considering. It has FDIC insurance. But the bank is not very stable. The stock price, for example, was above 40 in the last year. It is below 5 now. But as long as your entire deposit is covered by FDIC you are in safe (though if a bank goes under – not that likely – there can be a delay in getting your money). Normally a bank’s assets would be bought out by another bank.
And today I read of the second largest bank failure in the history of the USA, IndyMac Bank seized by federal regulators:
Regulators said depositors would have no access to banking services online and by telephone this weekend, but could continue to use ATMs, debit cards and checks. Online banking and phone banking services are to resume operations Monday.
Federal authorities said based on a preliminary analysis, the takeover of IndyMac would cost the FDIC between $4 billion and $8 billion.
It is important to make sure your deposits are FDIC insured (in the USA), and to know the limits of the coverage.
FDIC Failed Bank Information Information for IndyMac Bank, F.S.B., Pasadena, CA
IndyMac was a huge mortgage focused bank. Their stock price had fallen from a high of nearly $30 in the last year to below $5 in April, $2 in May and $1 in June. It is a very good thing we have the FDIC.
Related: Credit Crisis (August 2007) – Credit Crisis Continues – Homes Entering Foreclosure at Record
Energy and food prices have obviously been increasing dramatically. The economist has a nice chart showing where people spend most on food and fuel. In the USA, Canada, Western Europe and Australia people spend less than 25%. In Brazil, India, China, Mexico, South Africa, Turkey… they spend 25-40%. In Argentina, Saudi Arabia, Russia, Pakistan… they spend 40-50%. And in Mongolia, Nigeria, Iran, Kenya, Madagascar… they spend over 50%.
The data is from the IMF. As with any economic data there are issues to consider about comparing across countries. Still this is a stark illustration that the impacts those in the wealthy countries feel from rising energy and food prices are felt to a greater degree in poor countries (that already have economic difficulties).
Related: Food Price Inflation is Quite High – Helping Capitalism Make the World Better
The race has barely begun – finished plants are years away – but it’s blazing fastest in the Mojave, where the federal government controls immense stretches of some of the world’s best solar real estate right next to the nation’s biggest electricity markets. Just 20 months ago only five applications for solar sites had been filed with the BLM in the California Mojave. Today 104 claims have been received for nearly a million acres of land, representing a theoretical 60 gigawatts of electricity. (The entire state of California currently consumes 33 gigawatts annually.)
Related: Solar Thermal in Desert, to Beat Coal by 2020 – Solar Tower Power Generation – Global Wind Power Installed Capacity – real estate investing articles
Failing to save is a huge problem in the USA. Spending money you don’t have (taking on personal debt) and not even having emergency savings and retirement savings lead to failed financial futures. Even though those in the USA today are among the richest people ever to live many still seem to have trouble saving. Here is a simple tip to improve that result for yourself.
Anytime you get a raise split the raise between savings, paying off debt (if you have any non-mortgage debt), and increasing the amount you have to spend. I think too many people think financial success is much more complicated than it is. Doing simple things like this (and some of the other things, mentioned in this blog) will help most people do much better than they have been doing.
There are lots of ways to spend money. And many people find ways to spend all or more than all (credit card debt, personal loans…) they have which are sure ways to a failed financial future. So anytime you get a raise (a promotion, new job…) take a portion of that extra money and put it toward your financial future. The proportion can very but I would aim for at least 50% if you have any non-mortgage debt, don’t have a 6 month emergency fund, or are behind in saving for retirement, a house…
Exactly how you calculate if you are behind, I will address in a future post (or you can look around for more information). By taking this fairly simple action you will be setting yourself up for a successful financial future instead of finding yourself falling behind, as so many do. And then when things go badly, as they most likely will sometime during your life, you will have built up a financial position to draw on. Instead of, as so many do now, find that you were living beyond your means when things were going well – which it doesn’t take a genius to see will lead to serious problems when things take a turn for the worse.
So lets say you take a new job and get a raise of $4,000 a year. Instead of spending $4,000 more just put $2,000 away (pay off debt, add to your retirement savings, add to savings for a house, add to your emergency fund…). Then you get a promotion of another $3,000, increase your spending by $1,500 and save the rest. It is such a simple idea and just doing this you can find yourself in the top few percent of those making smart financial decisions. And if you get to the point that you are ahead in all your financial areas then you can take more of each raise you get (but most of the time you will have learned how valuable the extra saving are and figured out the extra toys really are not worth it). But if you want to, once you have created a successful financial life, you can choose to buy more toys.
Related: Retirement Savings Survey Results – Earn more, spend more, want more
There are external risks to your financial health. Many people ruin their financial health even before any external risk can, but lets say you are being responsible then what risks should you seek to protect yourself from?
| Risk | Strategy | Also |
|---|---|---|
| medical costs | health insurance | emergency fund, healthy lifestyle to reduce the likelihood of needing medical care |
| property losses (house damaged, car stolen, property damage…) | homeowners insurance, rental insurance | |
| job loss | emergency fund, unemployment insurance (provided by the government and paid for by the company in most cases – in the USA) | updating skills, maintain a career network, education, learning new skills |
| disability (which both damages your earning potential and often has medical care costs) | disability insurance, health insurance | social security disability insurance – in the USA |
| investment losses | sound investment portfolio and strategy (diversification, appropriate investments, adjusting investment strategy over time) | extra savings |
| having to pay damages caused to others | homeowners insurance often includes personal liability coverage (and car insurance often includes some coverage for damage you cause while driving). check and likely choose to pay for extra liability insurance – costs to add coverage is normally cheap. | |
| unexpected expenses | emergency fund | extra savings |
| loss of income of someone you rely on (spouse) | life insurance | extra savings |
Another protection is to be financially literate. You can risk your financial health by being fooled in spending money you should save, borrowing too much for your house, failing to buy the right insurance, using too much leverage, investing too much in high risk investments…
Related: credit card tips – personal finance tips – personal loan information
The largest oil consuming countries (and EU), in millions of barrels per day:
| Country | consumption | % of oil used | % of population | % of World GDP |
|---|---|---|---|---|
| USA | 20.8 | 25.9 | 4.5 | 21.0 |
| European Union | 14.6 | 18.1 | 7.4 | 21.9 |
| China | 6.9 | 8.6 | 19.9 | 10.7 |
| Japan | 5.4 | 6.7 | 1.9 | 6.5 |
| Russia | 2.9 | 3.6 | 2.1 | 3.2 |
| Germany | 2.6 | 3.3 | 1.2 | 4.3 |
| India | 2.4 | 3.0 | 17.0 | 4.6 |
| Canada | 2.3 | 2.9 | 0.5 | 1.9 |
| Korea | 2.1 | 2.7 | 0.7 | 1.8 |
| Brazil | 2.1 | 2.6 | 2.9 | 2.8 |
| Mexico | 2.1 | 2.6 | 1.6 | 2.1 |
All data is from CIA World Factbook 2008 (downloaded Jun 2008). GDP calculated using purchasing power parity.
Related: Top 10 Manufacturing Countries 2006 – Country H-index Rank for Science Publications – Best Research University Rankings (2007)
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Even worse is the influence of the pork-barrel. Only around 20 states use cost-benefit analyses to evaluate transport projects; of these, just six do so regularly. Alaska’s “bridge to nowhere” is an infamous result of this sort of planning. But it is not exceptional. Two months after the bridge collapsed in Minneapolis, the Senate approved a transport and housing bill that included money for a stadium in Montana and a museum in Las Vegas.
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Such plans stand in stark contrast to the federal government’s strategy today. America invests a mere 2.4% of GDP in infrastructure, compared with 5% in Europe and 9% in China, and the distribution of that money is misguided.
I think they underestimate our ability to ignore. For example we have over $500,000 in federal government debt per household and continue to raise taxes on future generations without any guilt. I think our capacity to ignore is pretty large and certainly large enough to ignore the decision to spend money on things other than infrastructure repair.
I think those that don’t somehow manage to remain ignorant all know that China has taken the lead in investing in infrastructure and that the USA has chosen to elect politicians that are gutting infrastructure investments (and still spending far beyond the resources they have available). I can’t imagine many who understand economics have any trouble seeing which country is investing in the future and which country is selling out its future. It is not the choice I wish was being made in the USA but it is obviously the choice we are making.
Related: USA Infrastructure Needs Improvement – Politicians Again Raising Taxes On Your Children – Manufacturing Takes off in India – True Level of USA Federal Debt
Poorer Than You posed the question: Where to Stash Your Rainy Day Fund?
Pros: Interest rate usually meets or beats inflation, transfers to checking account, separation from checking decreases temptation to spend, no minimum balance requirement
Cons: Slow transfers may hinder urgent emergencies, limited by federal law to 6 transfers out of the account per month
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Personally, I’m using a credit card/online savings account combination right now. After I graduate from college and grow my emergency fund, I’ll move most of the fund to a money market savings account, and perhaps keep a couple hundred dollars in cash as well.
Here are my thoughts:
A money market fund is where I used to hold emergency funds, but things have changed. Money market funds are paying less than inflation (especially true inflation – which exceeds reported inflation). Right now high yield savings is where I have my emergency funds. You need to not only pick a good choice but pay attention to see if the marketplace shifts and certain options are not as appealing as before.
I would use a credit card for immediate spending needs and then paying the balance in full with funds from high yield savings. But right now high yield savings accounts pay more than money market funds, so just stay with high yield savings. If money market funds pay more in the future then I would put the emergency funds there.
Related: Personal Finance Basics: Health Insurance - personal finance tips