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LTCI Watch: Inflation

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This week, the Federal Open Market Committee (FOMC) increased the target range for the federal funds rate by one quarter of a percentage point, from a 0.25 percent to 0.5 percent.

The Federal Reserve Board of Governors voted separately to increase the discount rate, or rate for direct loans to member banks, by one quarter of a percentage point, to 1 percent.

See also: What Fed increase? Top Treasuries forecaster is bullish for 2016

It was a little hard to find references to insurance companies, pension plans or even garden variety retirement savers in news stories about the rate increase. We ran a wire service story about the increase, and even the reporter who wrote that story seemed to somehow overlook entities that control huge chunks of the economy. 

But, of course, prolonged moves to keep rates at artificially low levels for years have starved insurers, pension funds and individual retirement savers’ of access to relatively stable investment income from bonds. The central bankers in the United States and the rest of the world have, in effect, backed efforts to steal money from the retirees of the future, including the aged long-term care (LTC) services recipients of the future, to help the people of today buy new cars and rickety new houses.

Many economists say that weak business demand for capital is the true driver of low rates, and that central banks have only a limited ability to affect rates on the highly rated, long-term corporate bonds insurers, pension funds and many individual retirement savers prefer to buy. But the central bankers have done nothing to use whatever market-moving powers they do have to get interest rates out of the basement.

Of course, they are smart, hard-working, patriotic people who just want the best for everyone, including insurance companies and retirement savers, but I think one the reasons for their lack of action on interest rates is misleading inflation indicators.

See also: Wall Street worries just a bit of inflation will shock markets

The Bureau of Labor Statistics (BLS) does its best to figure out what U.S. consumers are really spending on items such as beef, cable television packages and cellular telephone service when it calculates the Consumer Price Index (CPI)

But I look at my own wallet at the end of a pay period and can see that the idea that the cost of what I buy is stable is absurd. 

One possible source of CPI fail is that the quality of the food available in supermarkets seems to have deteriorated, and the newspapers are full of stories about how buying ordinary groceries will poison my child and destroy the world. The result is, whether those headlines are right or wrong, the standard basket of groceries that a typical financial services prospect buys today probably looks much different than the basket a similar prospect would have bought 20 years ago.

Even though BLS workers do their best to get complete, accurate Internet service and cell phone service price information, CPI calculations may not really reflect how critical having high-speed Internet service has become. 

The result is that inflation is not real for some character from The Brady Bunch who has been kept in a glass bubble for 40 years and is probably enjoying stable prices, but the rest of us are watching the cost of the bundles of goods and services that we feel we need to survive soaring through the roof, and robbing us of the dependable flow of excess cash we need to plump up our retirement savings and pay for personal protection insurance.