One of the reasons we launched Inflation Survival Letter and Survival of the Fittest is our belief that the real level of inflation in the US economy is radically understated. It’s not a case of the government doesn’t know inflation exists; rather, it’s a case of willful ignorance.

The government has a number of incentives to misstate the true level of inflation in the economy and the recent budget battle between President Obama and Congress is an excellent example of that.

Conservatives have long argued that overly generous entitlement programs – including Social Security – will ultimately bankrupt America. As part of the grand bargain that the White House and congressional Republicans were working towards to move past last year’s budget impasses, President Obama agreed to use an inflation calculation method called the chained consumer price index (CPI) to set annual cost of living increases for Social Security recipients in his 2015 budget proposal.

The difference between a chained CPI and the traditional CPI might seem largely academic to most; the conventional CPI simply measures price changes of a fixed basket of goods and services over time while the chained CPI adds a significant nuance.

Chained CPI uses the idea of substitution; when the price of steak goes up, consumers buy hamburger instead. But the substitutions aren’t always so apples-to-apples. In fact, when the price of apples goes up, bananas could be substituted in their place. They’re both fruit, but what if you don’t like bananas?

Quality adjustments also come into play, counting an item at a lower cost if the quality improves, even if the price hasn’t changed.

As a result of those changes it is estimated that the chained CPI actually goes up about 0.25 percent to 0.3 percent slower. That won’t sound like much to most of us, and even the AARP concedes that for most retirees the change in the calculation would, at least initially, probably amount to a reduction in annual benefits of less than $100.

The problem arises from the fact that most retirees greatly underestimate how long they will live. A 2012 report from the Society of Actuaries found that fully 4 in 10 people will underestimate their life spans by five years or more. About 25 percent of 65-year-olds today will live past the age of 90 and 1 in 10 will live past the age of 95, according to estimates from the Social Security Administration.

For those Americans living 30 years or more in retirement, those lower cost of living increases will have a cumulative effect resulting in annual benefit payments that amount to thousands of dollars less than the actual cost of living by the end of their lives. At that point, the horror story of choosing between medication and food can become a reality.

So why would the government want to shortchange American seniors? The Congressional Budget Office estimates that the change would reduce our nation’s budget deficit by $233 billion over the next decade alone.

But the changes wouldn’t end there.

The chained CPI method would also ultimately apply to the pensions collected by civilian government workers – a group that generally doesn’t get much sympathy – as well as military and veterans benefits, which include cost of living calculations. It would also reduce the amount the government spends on Pell Grants, need-based grants given to low-income college students to help make education more affordable.

But the changes don’t stop there either.

If President Obama had stood by his initial budget the chained CPI would have eventually impacted every American at tax time. That’s because the CPI is used to determine changes to tax brackets and, under the chained CPI, the thresholds for those brackets would increase at a much slower pace. That means we would all end up paying more in income taxes each and every year.

So while the President’s decision to drop the chained CPI from his budget proposal will likely result in a slight deficit increase, every American will ultimately benefit from somewhat lower taxes in their working years and fairer cost of living increases on their pensions in retirement.

Portfolio Updates

Agrium (NYSE: AGU) reported an expected 72 percent decline in its fourth-quarter profit on lower sales volumes and prices. The breakup of the Eastern European potash cartel last July set off intense pricing pressures across the market even as cold, wet weather shortened the season that US farmers use to apply fertilizers.

The company sold 344,000 tons of wholesale potash at an average price of $313 per ton in the quarter, with volume up slightly from 341,000 tons a year ago but at a much lower price; last year it realized $449 per ton. Nitrogen sales were down significantly though, falling from 966,000 tons in the same period last year to 907,000 tons as the average selling price fell from $561 to $458.

Retail sales, which include direct sales of fertilizer, chemicals, seed and equipment were a bright spot though, rising 6 percent to $2.1 billion.

Total revenue declined by 7 percent in the period to $2.9 billion, with net earnings per share coming in at 87 cents. While revenue missed analyst estimates by about $750 million, the earnings news was still well received after Agrium warned last month that earnings would likely come in at the lower end of its guidance of between 80 cents and $1.25.

While the fourth quarter was challenging largely due to external factors, we expect long-term fertilizer demand to continuing growing.

Continue buying Agrium under 100.