Low inflation helps value of savings

Inflation has been so low for so long there was little notice of the announcement just over a week ago that the chief inflation gauge had reached its lowest level in 40 years.
Core inflation -- measuring consumer goods except for food and energy -- has run only 1.1 percent for the 12 months ending Nov. 30. Something that cost $1 at this time last year now costs just 1.1 cents more -- $1.011.
Even with food and energy included, the inflation rate was only 1.8 percent. Food and energy prices tend to move up and down sharply over short periods, so the core figure that excludes them is considered a better gauge of the overall trend in prices.
A look at numbers
Lest we forget to count our blessings, here are some quick numbers to show the value of low inflation.
Suppose you had $10,000 in savings. You could spend it today, of course, and get $10,000 worth of anything you like.
Or you could continue to save it. If inflation averaged 1.1 percent a year, in 20 years your $10,000 would buy what about $8,000 buys today.
With inflation twice as high, 2.2 percent, your savings would be worth only $6,500 after two decades.
And at 4.4 percent, it would be worth only $4,200.
Over long periods, inflation averages about 3 percent. That would cut the buying power of your $10,000 to about $5,500 over 20 years.
Most people, of course, would expect to get some sort of investment return on any money they could set aside for 20 years.
If you could invest in a mix of stocks and bonds with an annual return averaging 8 percent, $10,000 would grow to about $46,600 in 20 years, assuming you had no tax bills.
With inflation at 1.1 percent, you'd end up with $37,450; at 2.2 percent, $30,160; at 4.4 percent, $19,700.
At the long-term average of 3 percent inflation, you'd end up able to buy what $25,800 gets today.
Calculations
As long as we're playing with numbers, here are some credit-card calculations worth noting.
The idea is to figure what your holiday spending will really cost if you put it all on a credit card and then make only the minimum monthly payments required.
Borrow $1,000 on a card charging 13 percent and make the typical minimum payment and you'll pay about $670 in interest. It'll take nearly 11 years to clear the debt.
At a rate of 18 percent, it would take nearly 15 years to clear the debt and cost about $1,360 in interest.
Do your own calculations on the holiday Web site set up by AmeriDebt, a debt counseling company, at http://www.truecostofholidayshopping.org/.
Charity gifts
Thinking of making a gift to charity for the holidays? If you're going to draw on your investments, be sure to do it in the most tax-savvy way.
If the investment has gone up in value, don't sell it, give it away. Selling a profitable investment, such as shares of stock that have increased in price, will trigger a capital gains tax that you'll have to pay even if you give the proceeds to charity.
By giving the investment itself, you avoid the gains tax, which for most investors is 15 percent of the profits. At the same time, you will be able to deduct the full market value of the gift on your federal tax return.
If your investment has lost money, do the opposite -- sell it and make a gift of the cash.
This way, you can report a tax loss on your return, while still getting a deduction equal to the amount you give away.
The tax loss is the difference between what you paid for the investment and what you got for it.
The loss can be used to offset gains realized on other investments you sold in 2003, reducing your capital gains tax. If losses are greater than gains, up to $3,000 in losses can be used to offset ordinary income, thus reducing your income tax.
Losses also can be saved and used to offset capital gains and income in future years.
XJeff Brown is a business columnist for The Philadelphia Inquirer. E-mail him at brownjphillynews.com.