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Open Your Eyes to Inflation

By now, you've seen that many items are rising in price steeply lately -- items other than gasoline.

According to the U.S. Department of Agriculture, food price inflation is at its worst level in 17 years, with prices having surged some 4% in 2007 (compared to an annual average of 2.5% during the past 15 years). And according to the World Bank, food prices have risen much faster worldwide -- up to 80% over the past three years.

Want some specifics? In the U.S., eggs are up about 25% over the past year, milk has risen by about 13%, and poultry has gained 7%. Bread and orange juice are both up substantially over the past two years. Worldwide, white beans have more than quadrupled in price over the last two years, and corn has doubled. Rice rose nearly 150% over the past year.

It seems that 2008 might see a food price inflation rate of around 4.5%. Here's how you might think of these numbers: If you typically spend $10,000 on food, you'll be up to $10,400 after a 4% increase, and $10,868 after a subsequent 4.5% hike. Tack on two more years of 4% gains, and you'll be spending $11,755. Got it? That's almost 20% more than you started spending, and in just four years. Is your salary likely to rise as quickly? I didn't think so.

What it means
These increases ripple through our lives. You can expect restaurants to hike their prices, too. A recent AP story noted some modest increases -- 1.5% from Cheesecake Factory (Nasdaq: CAKE  ) at the end of February, and 3% from Applebee's (which was recently taken over by IHOP (NYSE: IHP  ) . An Allentown, Pa., Morning Call article noted that some companies, such as Subway and Papa John's (Nasdaq: PZZA  ) , lock in food prices for long periods with contracts, so they may not be feeling the food-inflation pinch just yet. These contracts will run out, however, so if food prices keep rising, even those restaurants will probably hike prices.

What to do
Couple the increases above with the dreadful increases in gasoline prices, and it becomes critical for us to pay attention to our budgets. You may not realize how much more you're spending on many basic items. You may not realize until it's kind of late how little you have left at the end of the year to invest in your retirement. You'll be able to park $5,000 (or $6,000, if you're 50 or older) in your IRA for 2008. Will you have that money available? (Learn more in our IRA Center.)

The best approach is to follow the old saying: "Pay yourself first." In other words, take out your savings and investment money soon after you get your paycheck. Don't wait until the end of the month or year to see what's left.

We'd love to help you make the most of your retirement savings and investments. I invite you to check out our Rule Your Retirement newsletter service. It distills what you really need to know into a manageable volume each month. A free trial will give you full access to all past issues. It regularly offers recommendations of promising stocks and mutual funds, too.

As an investor, it's also smart to keep an eye on inflation, as rising input prices will put pressure on many companies' products. Yes, they can raise prices, but until they do, they'll be feeling a pinch, and when they do, they run the risk of losing some sales.

A silver lining
Finally, here's a little reason to take heart: Not all prices are rising. Jay Hancock of The Baltimore Sun recently noted that consumer electronics, including televisions, cameras, and watches, have seen substantial price reductions. He added that apparel in general is down 1%, and women's apparel is down 4%. Carpeting, bedroom furniture, and tools also fell a bit.

That can't be good news for retailers like Best Buy (NYSE: BBY  ) , Sears Holdings (Nasdaq: SHLD  ) , and Chico's FAS (NYSE: CHS  ) , all of which are down sharply in the past year. But for consumers, it's at least a small offset against the prices you pay at the pump and the supermarket.

Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. The Motley Fool owns shares of Best Buy, which is aMotley Fool Stock Advisor recommendation. Best Buy and Sears Holdings areMotley Fool Inside Value recommendations. Try any newsletter you like, free for 30 days. The Motley Fool is Fools writing for Fools.


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Selena Maranjian
TMFSelena

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter...

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9/22/2014 4:02 PM
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PZZA $40.94 Down -0.01 -0.02%
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