In days of Christmas past, your true love would start the gift-giving season with a partridge in a pear tree and end it with twelve drummers drumming. Originally published in 1780 in England, “The Twelve Days of Christmas" catalogs a series of increasingly grand gifts given on each of the twelve days of Christmas. If you wanted to replicate the gift giving highlighted in the old song, according to the annual survey done by PNC Financial Services Group it would cost you over $170,000, an increase of less than .2% over last year. The slight increase can be blamed on the increased cost of the Geese and an increased demand for Golden Rings. Those were offset by a decrease in pear tree and turtle dove prices.
PNC started the Christmas Price Index (CPI) as a fun lesson on economic trends and inflation. An index is a way to measure changes in price of a representative group of items. The CPI is a measurement of the cost of goods and services used in the twelve days of Christmas. When measured in the year 2000, the twelve days of Christmas cost a total of $15,210. The difference between the cost in the year 2000 and today’s cost is inflation and reflects an erosion of purchasing power. In fact, the CPI has increased 18% per year over the past 16 years.
If you follow economic indicators there is another CPI that is important; the Consumer Price Index. The CPI measures the change in the weighted average cost of a basket of consumer goods and services from one month to the next. These changes are an indication of the health of our economy and provide a gauge of the inflation rate. In fact, the Consumer Price Index may be the single most important economic indicator available. The Federal Reserves uses changes in inflation to adjust its monetary policy. They manipulate interest rates in the hope of keeping inflation under control. Many pension plans and employers also use the CPI to determine if a cost-of-living adjustment will be given.
When you are still in the workplace the impact of inflation is mitigated by increases in your salary. Conversely, if you are on a fixed income and your pension is not indexed to inflation you experience first-hand a decrease in your purchasing power. As the Christmas Price Index shows, if the cost of ten lords a leaping goes up you may not be able to afford ten of them.
If all you had to worry about was the Christmas Price Index and the increased costs of gifts for your true love you could simply get creative with your gift giving. However, the Consumer Price Index can impact you all year round. Do you have a plan to compensate for changes in either CPI? If not, I encourage you to seek the counsel of a Certified Financial Planner ™ with the knowledge to help make sure that your financial plan doesn’t fall short.