Inflation is a hidden form of taxation. Inflation has severely damaged the purchasing power of the U.S. dollar since as far back as 1913 when the Federal Reserve was founded after the passage of the Federal Reserve Act by legislators in Washington D.C.
Prior to the establishment of the Federal Reserve (a private entity with a governmental sounding name), inflation was not a significant problem for most Americans.
After the Federal Reserve was created, the value of a dollar fell by at least 98% over the next 100+ years. As a result, $1 in 1913 is now worth close to about 2 cents in 2017.
Numbers Don’t Lie – Unless Created by Economists
One of the most laughable and fraudulent economic numbers released each year by governmental agencies such as the Bureau of Labor Statistics (BLS) is the annual inflation rate as noted by the CPI (Consumer Price Index).
The CPI is the broadest measure of consumer price inflation for goods and services in the U.S. Historically, the CPI index tends to hover in the 2% to 3% range when the real inflation numbers are probably at least twice as high.
It doesn’t matter so much what economists claim about annual inflation numbers. What’s more important to individuals is how much they personally pay for necessary goods and services on a consistent basis.
Most of us know that basic items such as food, clothing, gasoline, utility costs, and rent prices are moving at much higher rates than just 2% to 3% per year.
20 Items Driving up Your Bill
According to the Economic Policy Journal, between 2006 and 2016, these 20 items are driving up your grocery bill the most.
1. Tobacco and smoking products
> Price increase: 90.4%
> Price increase: 63.6%
3. Uncooked ground beef
> Price increase: 46.3%
4. Shelf stable fish and seafood
> Price increase: 45.0%
5. Prescription drugs
> Price increase: 43.5%
6. Rice, pasta, cornmeal
> Price increase: 40.3%
> Price increase: 38.9%
> Price increase: 38.4%
9. Miscellaneous poultry including turkey
> Price increase: 37.0%
> Price increase: 36.6%
> Price increase: 35.8%
12. Canned vegetables
> Price increase: 35.3%
13. Salt and other seasonings and spices
> Price increase: 34.0%
14. Miscellaneous fats and oils including peanut butter
> Price increase: 34.0%
15. Miscellaneous processed fruits and vegetables including dried
> Price increase: 33.7%
16. Bacon and related products
> Price increase: 33.2%
17. Fresh whole chicken
> Price increase: 32.5%
18. Cakes, cupcakes, and cookies
> Price increase: 32.1%
19. Flour and prepared flour mixes
> Price increase: 32.1%
20. Canned fruits
> Price increase: 32.0%
Real Estate: An Exceptional Hedge Against Inflation
Yes, real estate is an exceptional hedge against inflation if you own the property. This has proven to be true since the early 20th century, partly since values have consistently compounded annually at a pace at least as high as the annual reported inflation numbers.
However, inflation can be your number one enemy if you rent.
After the implementation of Quantitative Easing (QE) policies in late 2008, the value of the dollar has rapidly fallen while consumer goods and asset prices have skyrocketed.
Once again, the primary stated goal of QE was to boost asset prices by creating trillions of extra dollars “out of thin air” by the combined efforts of the Federal Reserve and U.S. Treasury. When too much money chases too few goods, rampant inflation is typically the outcome.
Real estate prices have reached historic highs in prime coastal regions in Los Angeles, San Francisco, Seattle, Boston, and New York City due to record low interest rates, fewer construction projects, and increased demand from people who can’t afford to buy a home.
Wasn’t it just 10, 20, or 30 years ago that a person could rent a nice two-bedroom apartment for $300 to $700 per month?
Today, rents are outrageous for many tenants and welcomed by landlords who see their property values and incomes increase dramatically.
Top 15 Priciest Rental Regions
The Department of Housing and Urban Development (HUD) guidelines suggests that any tenant who pays more than 30% of their monthly income on rent is “housing cost-burdened” as a result.
Per this rental income analysis below of the Top 15 most expensive rental regions in the U.S., the publication Smart Asset used a maximum 28% housing expense number for qualified rental applicants, so that they would not be classified as “housing-cost burdened” by HUD.
Sadly, many of the most expensive housing regions, such as Los Angeles and San Francisco, have averages closer to tenants paying 50%+ of their monthly income on just rent alone.
Let’s review the average annual income needed by a qualified tenant for a two-bedroom apartment in the Top 15 most expensive housing regions in 2017:
City 2-Bedroom Rent Annual Income Needed
San Francisco, CA $4,189 $179,529
New York, NY $3,841 $164,614
Boston, MA $3,166 $135,686
Los Angeles, CA $2,556 $109,543
Washington, DC $2,416 $103,543
Chicago, IL $2,254 $ 96,600
Seattle, WA $2,025 $ 86,786
Miami, FL $1,722 $ 73,800
Philadelphia, PA $1,572 $ 67,371
Riverside, CA $1,431 $ 61,329
Atlanta, GA $1,258 $ 53,914
Dallas, TX $1,204 $ 51,600
Houston, TX $1,088 $ 46,629
Detroit, MI $1,087 $ 46,586
Phoenix, AZ $ 958 $ 41,057
Since inflation is likely to continue at a fast pace, owning real estate will always be more beneficial to investors than to the tenants scrambling to keep up with the increasing rents.
There are many happy landlords who have seen their net worth increase due to increasing inflation and rental prices.
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