Q. I'm curious about the federal government's reporting and its accuracy of the national inflation rate or CPI. I read that the inflation rate hovers around 3% or less, but I have this dubious feeling that the actual rate is much higher than what we are being told.

If I am right, what do you think the more-likely rate is? I would like to know your thoughts on this. I am pretty sure that the criteria the government uses to determine the rate is not figuring in all of the things that we consumers have to contend with daily.

For a few examples: Casualty and liability insurance rates are up 30% to 45% during the past year; down-sizing in drug and grocery stores is prevalent and much of the economy size packaging has disappeared from shelves; banking fees and charges for customer accounts have escalated considerably; municipal taxes and service fees are continually raising; etc., etc. Then there has been the significant rise in energy and fuel costs that seem not to have affected the reported inflation rate. This could develop into a fairly long list-and I don't see how all these escalating cost-of-living items could be included and not raise the low CPI rate that I keep reading about.

I realize that ones regional location ( i.e., S. Central vs. NE US.) makes a difference, so we have to consider this when compared to the national average. However one looks at it, I don't buy the lowly under 3%.

---B.W.@ smu.edu

  

A. The Consumer Price Index is a very elaborate statistical exercise done by the Department of Labor. There have been disagreements about its use, construction, and methodology since the sixties. Both government and non-government entities dissect and comment on the index regularly.

The bottom line: how you feel about the CPI depends very much on who you are and where you spend your money. If you are an older person who has to pay for medical insurance, medical bills, drugs, other insurance coverage for property, etc., YOUR cost of living is probably rising faster than the CPI. If you are a college student drinking soda in the soda wars, eating burgers in the burger wars, and putting every spare dime into electronic equipment, the CPI is a wild overstatement of your cost of living.

The CPI is very broad index, that gives a representative picture of price inflation. But it isn't perfect and it wasn't made for you or me alone. I'd like to hear from readers who keep fastidious Quicken records on how their expenses have risen faster or slower than the CPI over the last five years. My bet is that total expenses track fairly well with the CPI.

  

Q. My company has been bought out and as a result I now have the chance to put my 401K funds into Vanguard funds. I seem to remember a column that you wrote regarding "couch potato investing" by splitting investments in two different Vanguard funds. Please refresh my memory as to which two funds I need to put my money into in order to use this strategy.

---D.L., Dallas, TX

  

A. The basic idea behind the Couch Potato is that you buy index funds that hold assets representing the broad distribution of financial wealth. The idea was that you would do no better or no worse than everyone else in performance but you could improve your position by saving more.

It also turned out that it was very simple, requiring about a 50/50 ownership of stocks and bonds. Anyone who can divide by 2 can put the couch potato into practice. The first portfolio was 50% Vanguard Index 500 for stocks and 50% Vanguard Total Bond market for fixed income. Since then I have substituted the Vanguard Intermediate Treasury fund. This reduces risk with little or no cost in return.

You can also put the idea in practice with "one stop shopping" by buying the Vanguard Balanced Index fund which is 60 percent stocks, 40 percent bonds. This now resembles the public portfolio more closely than 50/50 since so much money has gone into equity funds.