he Bermuda Government Inflation Index reported another jump to 3.9 percent recently, which is perhaps not news to anyone trying to stay on a budget. It certainly was no surprise to me. As a qualified investment advisor and planner taking the long-term conservative viewpoint, I had been using a 4 percent average inflation rate for general living expenses to determine probability of achievement models for the last five years. I increased this rate to 5 percent about six months ago.

Globally, various indexes have been devised to measure different aspects of inflation. The Consumer Price Index measures inflation as experienced by consumers in their day-to-day living expenses; the Producer Price Index (PPI) measures inflation at earlier stages of the production and marketing process; the Employment Cost Index (ECI) measures it in the labour market. The CPI is generally the best measure for adjusting payments to consumers when the intent is to allow consumers to purchase, at today?s prices, a market basket of goods and services equivalent to one that they could purchase in an earlier period.

Unfortunately, citizens everywhere on fixed incomes (or possibly earning less than the average wage) have to spend more of their total income (their personal consumer price index) to purchase general living expense items. Thus, they have a considerably greater personal inflation rate than the government average ? see next week?s article for this discussion. Inflation has been defined as a process of continuously rising prices or equivalently, of a continuously falling value of money.

In spite of its long and rich history, few subjects in the field of economics are more confusing with professional economists never having reached broad agreement. Some see inflation as a monetary problem, while others see nonmonetary forces at work, such as monopolies, union demands for higher wages, oil politics, or the ?wage-price spiral?.

Witness the frenetic activity in oil markets. Each and every time there is an oil pricing crisis; pouring water (and diplomacy) seems to do little to solve the problem. Some nations are heavily criticised for excess oil consumption per capita while other nations in economic determination increase industrial production (thereby increasing demand for oil) in order to enter the twenty-first global capitalist society. Market forces determine current prices as demand outstrips supply, and vice-versa as production is ramped up, or industrial production declines.

Whatever the measure or reasons for inflation, Bermuda routinely faces another set of outside pressures, namely changes in currency valuations. When the US dollar was strong, goods were cheaper elsewhere. It made inventory sense to purchase items from Canada, Europe and other Far East nations. With the dollar sinking over the last year, other currencies have risen as much as 20-25 percent against the US (and Bermuda dollar), currency increase costs which retailers have no choice but to pass on to the consumer. In a way, inflation and currency fluctuations are double surcharge to the local pocketbook.

Investment markets and wholesaler purchases of goods and services have the ability to hedge against future oil costs, currencies (or any commodity), but the average consumer does not understand or in many cases have access to these sophisticated tools. So what can you do on a personal level to control inflation pressure in your household? Some things you cannot control easily, such as rent, gas, etc. but groceries take a large chunk out of every budget and you do have choices.Sounds like such generic advice, but how many shoppers take the time to actually compute pounds/ounces into grams and pints/quarts in litres. Knowing the actual cost per unit is the only way to comparison shop. Set up a spreadsheet of your most frequently needed items and track them over time. If you are truly trying to get every bang for the buck, avoid (like the plague) junk food, and non-essentials. No, isn?t easy, I am the biggest of fan of greasy donuts out there even though I own no stock in Krispy Kreme. Set a weekly dollar limit. You?d be surprised what is not so important, if you think of food as fuel instead of entertainment.The Wednesday 5 percent cash back is an inflation hedge right there.watch the unit price. Sometimes bulk buying is more expensive than small shelf items of same product.Investing in one?s own intellectual capital is its own reward.in investment products that will return greater than the rate of inflation over time.Explained. Recently, clients have been enquiring about TIPS which are inflation-protected bonds that are issued by the United States Treasury. TIPS work by adjusting the face value of the bond by the rate of inflation, creating a gradually increasing stream of interest payments as long as inflation continues to rise.

TIPS provide excellent diversification and have low correlation to other types of assets classes, so much so that some experts consider them a distinct asset class.

Very popular with US citizens, for Bermuda, there are a couple of Issues.

1) Bermuda?s inflation rate is definitely higher than that of the US on a consistent basis

2) TIPS are expensive to purchase i.e. a ten year costs 103 2 percent cpn yielding 1.6 percent, 20 year at 106 and so on.

3) The yields are very low compared to regular bonds, because they reflect the real rate of return of the market.

4) It is difficult and more expensive to hold small positions in an investment account.

It?s not an easy world we live in, and as one frustrated client said to me, ?it always seems that you end up with a compromise. Not what you really wanted.?

Absolutely true words, but were we ever promised that life would be perfect?

Martha Harris Myron CPA/PFS CFP? is a Bermudian, and VP, Investment Centre, Bank of Bermuda member HSBC Group, providing investment advisory services and planning. She is a NASD Series 7 license holder, formerly owning a US financial services practice of individual and corporate clients. She can be reached at onfidential email can be directed to marthamyronnorthrock.bm

@EDITRULE:The article expresses the opinion of the author alone, and not necessarily that of Bank of Bermuda member HSBC Group. Under no circumstances is the content of this article to be taken as specific individual investment advice, nor as a recommendation to buy or sell investment products, nor as a promotion for financial plans. The Editor of the Royal Gazette has final right of approval over headlines, content, and length/brevity of article.