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Personal inflation outpaces price index

With prices rising rapidly for everything from housing and health care to gasoline and electricity, you have to wonder about the accuracy of the government's measuring stick for inflation.

By HELEN HUNTLEY
Published October 2, 2005

The Consumer Price Index report for August showed costs going up at a 3.6 percent annual rate. If you think your costs are climbing much faster than that, you're probably right. The CPI measures a fixed basket of goods and services, and if you aren't purchasing those same goods and services, it won't accurately reflect your own rate of inflation.

The CPI has other inherent problems, too.

"An index like the CPI under-reports the housing component, largely because they look at what's the rental equivalent," said Scott Brown, senior economist at Raymond James & Associates in St. Petersburg. "If you're buying new, you pay a higher price. And if you live in a house, your homeowners insurance is going up. Property taxes are going up. Those things don't show up in the CPI."

While the most recent CPI showed the overall cost of medical care increasing at a rate of 3.9 percent, it does not reflect how the burden of those costs has been shifted increasingly from employers to employees through higher copayments and deductibles.

The CPI also takes into account that prices are decreasing for some items, such as clothing and electronic goods. If you don't buy those items, you don't benefit.

Where you live affects your inflation rate, too. The Bureau of Labor Statistics says prices in the first half of this year were up 3.4 percent over the prior year in the Tampa Bay area, compared with 3 percent nationwide. (The Tampa Bay number is released only twice a year.)

Although Florida is still no New York or California, the reality is it's becoming a more expensive place to live. That starts with the cost of housing. The average sale price of an existing home in the Tampa Bay area has risen 30 percent in the past year, compared with 16 percent nationwide. Only those who actually bought a house experienced that increase, but higher property values lead to higher rents, higher taxes and higher insurance costs. Add in the hurricanes and sinkholes, and property insurance rates become a budget buster for many homeowners.

I have often wondered why no one ever asks about using payable on death designations on bank CDs as a fast way of passing money without opening wills. I do it often to save rewriting my will every time I want to include someone else for a part of my estate. Is there something wrong with this practice that I should know about?

The biggest problem is that you could end up defeating your own intentions. The purpose of having a will (or a trust if you choose that route) is to have a document that treats your estate as a whole. The more you put in payable on death accounts, the less you have to be distributed according to the terms of your will. Your primary beneficiaries under your will might even end up getting less than those named on the payable on death accounts.

Another very real possibility is that by spending money held in some CDs, but not others, you could unintentionally disinherit someone or create unequal treatment of beneficiaries you intended to treat equally. Right now you may not be planning to spend any of the money, but you don't know what financial needs might be in your future.

Of course, if your will and your CDs all have the same beneficiary, these issues do not apply.

I have been hearing about LEAPS and would like to learn more about them and get a list of what's available. Can you tell me where to look?

A great source of information is the Options Industry Council Web site, www.888options.com LEAPS is an acronym for Long Term Equity AnticiPation Securities. Like all options, they offer a way to make a bet on a stock for less than it would cost to buy the actual stock. You can use them in various strategies, betting that a stock will go up or down. A major downside is that all options eventually expire. If the stock doesn't make the move you expect before that happens, you lose.

If you don't find the answers to your questions on the Web site, you can call toll-free 1-888-678-4667 weekdays or e-mail options@theocc.com to ask a question.

--Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.

[Last modified October 2, 2005, 01:57:16]