Inflation

If there's one thing Lettie Gay Carson has learned in all her years of fighting for improved public transportation in central Bucks County, it's patience. After nearly a decade of lobbying to restore train service between Fox Chase in Northeast Philadelphia and Newtown, where the 88-year-old Ms. Carson lives (and thrives, we might add), she's still waiting to savor an elusive victory. It baffles her, as it does us, why there's been so little progress on electrifying the rail line between Fox Chase and Newtown, which would make service possible with SEPTA'S Silverliner cars.

By Michael Silverstein Washington's big new idea for keeping Social Security solvent, while saving the government about $300 billion over 10 years, is something called the "chained CPI. " It could soon replace the standard measure of inflation - the consumer price index, or CPI - long used to keep seniors' real-world benefits from being whittled away by price increases. The new yardstick would virtually guarantee that future Social Security cost-of-living adjustments will be smaller than if the standard CPI were used.

"The Federal Reserve's job is to take away the punch bowl just when the party gets going. " - William McChesney Martin, chairman of the Federal Reserve Board, 1951-70. The party's going just fine. Indeed, it's time to take away the punch bowl. Since World War II, the worst mistakes in economic policy have occurred when prosperity seemed strongest. Modest inflation was allowed to get out of hand. Fighting it then required high unemployment and prolonged economic stagnation. The lesson: A pre-emptive strike against inflation makes sense.

Savers who want some protection against inflation should think about real estate. With living costs rising only 3 percent a year, inflation may hardly seem a concern. But most people remember the 1970s, when inflation breached 13 percent, causing prolonged stock and bond losses. Inflation comes in cycles, so a period of rapid price hikes isn't out of the question in the future. This could knock the stuffing out of bonds and blue-chip stocks, which typically make up the lion's share of retirement savings.

Inflation is a tax on our wallets. We're paying about $4 a gallon (or more) for gasoline, about as much for a gallon of milk, and feeling the effects of post-Civil War-high prices for cotton at clothing stores. Instead of fearing inflation, why not embrace it in your portfolio? Let's examine ways to play the trend and make money from inflation, specifically via exchange-traded funds. One of the chief ways to wager on rising inflation used to be by buying TIPS (Treasury Inflation Protected Securities)

It's important to practice what you preach. George Bush and his economic lieutenants say they want to encourage long-term economic thinking. The President should heed his own advice and stop heckling the efforts of Federal Reserve chairman Alan Greenspan to curb inflation. Combatting inflation is a classic case of doing something difficult today for much larger benefits tomorrow. The President disclaims any fight with Greenspan. Maybe. But Bush's complacency about inflation amounts to the same thing.

The Fed's reduction of one set of interest rates marked the beginning of the end of Alan Greenspan's war on inflation. The war began in February 1994 with the Fed's quarter-point increase in the rates that banks charge one another for overnight loans and led to a doubling of those rates, to 6 percent from 3 percent. It is not quite over yet. The financial markets expect further cuts. The war was phony. So was the enemy. Despite nonstop fretting by Greenspan, the Fed's chairman, no serious evidence of accelerating inflation ever emerged.

Despite a robust 0.7 percent increase in December, Americans' incomes failed to keep up with inflation last year, government figures showed yesterday. The Commerce Department said incomes grew 6 percent in 1990 to $4.65 trillion, after having advanced 7.7 percent in 1989. At the same time, inflation, measured by the Labor Department's Consumer Price Index, jumped 6.1 percent. December's gain in incomes reflected the fact that workers put in longer hours at higher pay levels.

Fighting inflation should remain the international community's biggest economic goal despite the recession in several large industrial countries, a world banking organization said yesterday. The Bank for International Settlements, which acts as a central bank to the world's central banks, dismissed the Bush administration's call for major countries to lower interest rates to spark economic growth. The bank said that taming inflation was more important than acting hastily to overcome recession.

Inflation is creeping out of its coffin vigorously enough to throw a real scare into many consumers and investors. It has surged back into the headlines, with January consumer prices soaring at a 7.2 percent annual rate and Federal Reserve Board Chairman Alan Greenspan promising to fight back by pushing interest rates higher. One key interest rate - the prime lending rate for bank loans - was raised to 11.5 percent yesterday by two large New York banks. Most other banks are expected to follow their lead today.

Inflation erodes the purchasing power of money over time. Its effects on your life depend on how well your income and investments do keeping up. Take a look at these sites to see how you're doing. Digging the data. InflationData.com is a personal-finance site edited by Tim McMahon. It posts a current inflation rate, based on the government's Consumer Price Index for All Urban Consumers, of 2.65 percent. The site is rich in articles, charts and links on housing, employment, other economic matters that go into the cost of living, and calculators for doing some figuring on your own. www.inflationdata.com Grim calculation.

Don't be misled by reports that inflation is tame. For small-business owners, it's a threat to profits and expansion plans. An 8 percent increase in the cost of eggs over the last year is eating away at restaurants and bakeries. Cotton's 14 percent increase is hurting clothing manufacturers and retailers. And any business that sends somebody on a sales trip is bearing the brunt of an 8 percent increase in jet fuel and 7 percent rise in gasoline. If this were a "normal" economy, companies could pass along the cost of doing business to customers.

The recent release of the 2006 minutes of the Federal Reserve Board - after the standard five-year lag - led many to wonder how the nation's chief financial stewards could have missed signs of the coming Great Recession. An examination of minutes over the last 30 years reveals that they failed to anticipate other downturns as well. Ever since the appointment of Paul Volcker as chairman in 1979, the Fed has judged inflation to be the major economic threat facing the nation, downplaying the dangers of unemployment and recession.

With the government pumping money into the economy and the Federal Reserve pledging to keep short-term interest rates low until late 2014, inflation could soar. What's an investor to do? Pure savers will lose. Low interest rates mean that your deposits aren't going to earn much of anything for the next three years. You're going to lose money on holding cash - after inflation. JPMorgan's Chris Millard explains that with a 2.0-2.5 percent inflation rate, "that means if you leave your money in cash for the next three years, you lose 2.5 percent of that every year.

WASHINGTON - Ben S. Bernanke defended the Federal Reserve's decision to hold interest rates at record-low levels for the next three years, during a contentious hearing before federal lawmakers. The Fed chairman told the House Budget Committee on Thursday that the central bank's plan is an appropriate step to combat high unemployment while inflation is stable. Bernanke was challenged immediately on the issue by the panel's chairman, Paul Ryan, a Wisconsin Republican, who said the Fed's move would risk higher inflation and hurt growth.

When the Federal Open Market Committee voted last week on the course of monetary-policy action, there was just one dissenting vote, down from three at the two previous meetings. The lone dissenter - Charles L. Evans , the head of the Federal Reserve Bank of Chicago - wanted the Fed to do more than stand pat after approving "Operation Twist" in September and disclosing in August a commitment to keep interest rates low until mid-2013. Those were steps that had prompted Charles I. Plosser , president of the regional reserve bank in Philadelphia, to cast "no" votes in August and September.

If you retire, how much money can you remove each year from your savings and make sure you don't rob your golden years of the gold you will need to put food on the table? In the last couple of decades, many financial planners had their clients live by what's called the 4 percent solution. Backed by research done in the 1990s, the solution enables a retiree in the first year of retirement to take 4 percent out of his or her total retirement savings and use it for living expenses. Then, each year the person can increase the amount just a tad to cover inflation.

I am often told that the cost of living has risen so much that it now takes two workers to support a family that in the "good old days" could be supported by one. Inflation is the villain. But a fallacy is embedded in that belief. Suppose you are a farmer growing tomatoes and you sell 100 at $1 each. Your income is $100. Then, food prices increase, so $100 buys less - except that your income increases identically since it is equal to the quantity of tomatoes you produce multiplied by the now higher price of tomatoes.

When you're one of 10 people who gets to vote on U.S. monetary policy, your words get dissected as if you were the manager of the division-winning Philadelphia Phillies . Federal Reserve Bank of Philadelphia president Charles I. Plosser is no Charlie Manuel . But listen to enough of their post-game or post-Fed-meeting interviews and you can see that they are similar in one respect: Both managers like to keep things simple....

WASHINGTON - Consumers are spending more to fill their tanks, feed their families, and pay the rent, the U.S. Bureau of Labor Statistics reported Thursday. At the same time, the number of people applying for unemployment benefits has reached the highest in three months. In the inflation report, the Bureau of Labor Statistics said consumer prices nationally rose 0.4 percent in August. In the Philadelphia area, where prices are measured bimonthly, local prices increased 0.7 percent in the July-August period, the bureau said.