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Everyday Pricing

The car horn blared as Carol pulled into the driveway - loaded down from a trip to the grocery store. If she was going to do battle at H-E-B, the least I could do was help unload.

Although it was only five bags, my bride appeared to have been in a 15-round prize fight. Ah yes, the joys of grocery shopping on a Saturday afternoon.

In an attempt to be nice, I said I'd put the groceries away. Shortly thereafter, I lost my mind. In the bottom of the first bag was the bill - $497.

I was furious. I was convinced there were unlimited amounts of things we didn't need - multiple copies of People magazine, solid gold gizmos and diamond encrusted doohickeys.

My jaw was on the ground. It was beyond me how we could average $100 per bag.

I immediately began to audit the bill looking for numerous wasteful purchases, but there were none.

The bags were full of food - just plain food. Much of it was house brands. My bride had actually gone out of her way to be as price conscious as possible.

I struggled to understand how the bill could be that much. We are told repeatedly that inflation, as per the government's Consumer Price Index, is a mere 2 percent year after year.

Being a number nerd, I went to double check the latest inflation data as reported by the Bureau of Labor Statistics. Yep, still 2 percent. Why, then, had my grocery bill gotten so large?

In simple terms, it gets down to how indexes are calculated and what you're measuring.

The Consumer Price Index calculation includes all goods and services purchased by the typical consumer. Many things, such as a car, washing machine or furniture, can be postponed or substituted.

Conversely, the Everyday Price Index, published by the American Institute for Economic Research, focuses only on the goods and services that are purchased on a daily basis. This includes things such as food, gasoline, prescription drugs, telephone and utilities. As such, it is very hard to avoid them or substitute around them.

In comparing the indices since 2002, the Consumer Price Index shows inflation has been modest - less than 2.5 percent per year. Conversely, the things measured by the Everyday Price Index have increased almost 4 percent per year over the same time frame.

In layman's terms, this means that $300 worth of groceries in 2002 would today cost about $396 using the Consumer Price Index calculation. However, the same run to the grocery store using the Everyday Price Index methodology ends up costing $466 - nearly 20 percent more.

It is certainly a pain felt by all Americans.

Making matters worse, at the same time - in inflation adjusted terms - median household incomes have fallen by 10 percent.

Regardless, whether you prefer the Consumer Price Index or the Everyday Price Index, the average consumer and investor are in a tough position.

This is an important reminder to allocate money in a way that will outpace taxes and inflation. This usually leads investors to stock market assets as the stock market has produced returns, net of inflation, of better than 6 percent per year.

However, for this to work, a wise investor must be able to stomach volatility and maintain a long-term time frame - 10 or more years.

Additionally, it's helpful to look for investments that can increase their prices over time to offset inflation as well as ones that are multinational in nature. Since a multinational company gets paid in a variety of currencies, it is a natural hedge against devaluation of the U.S. dollar.

No matter what your preferred metric is, the cost of things will continue to go up. As such, smart investors must be proactive to preserve their long-term purchasing power.

Dave Sather is a Victoria certified financial planner and owner of Sather Financial Group. His column, Money Matters, publishes every other week.

Originally published June 03, 2014, Victoria Advocate