Call it bad timing.

First, the Treasury announces that the interest rate on I Savings Bonds will plummet from 6.73 percent to 2.41 percent, due to an incredibly low inflation rate for the preceding six months--- a mere 1 percent a year. Less than three weeks, later the Bureau of Labor Statistics announces the raw inflation rate for the month of April: 0.9 percent. After seasonal adjustment, it was still a fiery 0.6 percent. The trailing 12-month rate was 3.5 percent.

The unexpected inflation increase deepened the tailspin of stock prices. It caused still more people to wonder if the BLS was "cooking the books."

In fact, the discrepancies that are so painful for I Savings Bond owners are largely a matter of timing, as explained in a recent column. But distrust of the Consumer Price Index runs deep. Everyone wants to know what the "real" inflation rate is. Most think it is substantially higher than the published figure.

As a practical matter, each of us experiences inflation differently.

Why? We spend our money differently. Your personal CPI is likely to be very different from the announced CPI. Here are some examples.

The Elderly. Retirees complain the most. They look at their medical bills, look at the announced inflation rate and wonder if Washington has moved to Mars. Part of the problem is that medical care has a weight of only 6.2 percent in the CPI-U, the most commonly used inflation index. Seniors spend a lot more than 6.2 percent of their income on medical care. Surveys indicate they spend about 20 percent. So they are more than 3 times as vulnerable to health care inflation.

Even the experimental CPI for the elderly, dubbed CPI-E, carries a medical care weight of only 10.2 percent. The experimental index shows that the rate of inflation for seniors is higher than the rate of inflation for urban workers. A research study at the Federal Reserve Bank of New York in 2003, for instance, found that between 1984 and 2001 the conventional index understated the inflation seniors experienced by 3.84 percent. Had the experimental index been used for benefits, the study found, Social Security retirement benefits would have been an average $408 a year higher. The OASDI Trust fund, the researchers noted, would also be insolvent 5 years earlier.

Debtors. Debt is good insulation from inflation. If a third of your income is committed to a fixed payment home mortgage and a fixed payment car loan--- a condition that describes millions of households in their 30s and 40s--- then you only need a 2 percent increase in income to cope with a 3 percent rate of inflation.

Debtors with variable rate, interest-only first mortgages and home equity lines of credit are at the other end of the spectrum. Over the last two years their debt service costs have been rising like prices in a banana republic.

Those with no debt, on the other hand, are fully exposed to whatever the general inflation rate is.

The Housing Conundrum. Shelter has always loomed large in the Consumer Price Index. It currently accounts for 32.3 percent of the index. It has always been problematic. In the late '70s, for instance, the largest single lever in the CPI was the interest rate on home mortgages. To stabilize the index, mortgage interest rates were eliminated, as were housing prices. A new measure was created, an "owners' equivalent rent" index.

The change eliminated some problems and created new ones.

The elimination of home prices worked to reduce the rate of inflation. The decline in home mortgage rates made homeownership so easy for so many that rents actually declined as renters became homeowners. Until late last summer, apartment-owning REITs were reporting lower average rents due to concessions. The combination worked to keep reported inflation rates low.

Now, higher interest rates are slowing home purchases, rental vacancies are declining, and rents are rising. Shelter may now start to fatten the CPI rather than slim it.

Whatever the "real" rate of inflation is, we can safely assume one thing: The direction is up, not down.

On the web:

Tuesday, May 23, 2006: "Did the Treasury rip off I Savings Bond Investors?

April CPI

NY Federal Reserve Bank Research Paper on CPI-Elderly

Economic Indicators