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Perspective on Inflation
Old 09-16-2013, 11:51 AM   #1
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Perspective on Inflation

The subject of inflation is interesting, as it affects our lives, and in particular as we look ahead to the future. Calculating needs on the basis of some type of percentage of increase, is a normal way of planning for retirement.
Probably correct in broad terms, but not necessarily true when it comes to individual items of expense.
Taking a few minutes to use the Government's Inflation Calculator
Inflation Calculator: Bureau of Labor Statistics
...can produce some interesting results.

Curiosity made me wonder how my final pre-retirement salary in 1986 would compare with today's workers, I was surprised to find out that it would have more than doubled....

On the other hand, other expense items don't work as well, using the CPI Calculator...
Example:
In 1954, my first year's college expense, was $1500, which, by using the calculator, would translate into $13,000 today. In fact, the current actual one year total cost, at the same school, is $63,000.

A loaf of bread in 1942, cost $.11 .... Using the calculator, today's cost would be $1.58... our actual cost for the same plain white bread is $.89 at Aldi's.

The Fairlawn Theatre feature movie cost in 1944, (including Pathe News and a Chapter picture... was $.14. The CPI Calculator says inflation would make that $1.82 today... Our local theater admission is $7.50 now.

My neighbor bought a new basic Ford 4 door sedan in 1953 for $1500. The CPI would make that $13,000 today. The base cost of a Ford Focus was about $18,000... by College cost standards, not too bad.

From a 1980 income tax calculation, my total cost, (subsidized by my employer) for medical insurance for my family of 6, was $1200... which would be inflation adjusted to $3400 today... and you can put your own number to what it might actually be today.

In 1972, we bought ground round hamburg for $.39/lb. which would be $2.17 today. Instead the cost is closer to $$4.00.

No special reason for these exercises, except for general interest, and of course your mileage will vary... So, just for fun... try your own calculations for things like gasoline, housing, or perhaps the cost of a new roof, or maybe an airline ticket.

Lastly... to save a comment...
"And your point is....?)
nada...
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Old 09-17-2013, 06:42 AM   #2
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21 inch color TV in 1956 was $495. That would be $4251 today.
A Schwinn catalog showed various bikes ranging from $50 - $80 which would be $394 - $631 today -- not to far off for basic bikes.
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Old 09-17-2013, 07:59 AM   #3
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Is Zvi Bodie aware of your research?
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Old 09-17-2013, 08:10 AM   #4
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21 inch color TV in 1956 was $495. That would be $4251 today.
Don't nearly all major purchases cost far less in terms of the number of hours of work needed to buy them than they used to in decades past?
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Old 09-17-2013, 08:22 AM   #5
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In 1995 (according to the earliest tax returns I have) our household income was half what it is today. I'm sure most folks on this forum would sniff at only doubling one's household income in 18 years. Also, investment income was about half then what it is today, even though we have several times the amount invested that we did in '95.

However, our taxes have more than tripled!

Not sure what to conclude from this, other than that government is not a lucrative profession

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Old 09-17-2013, 08:26 AM   #6
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16MB of memory in 1990 cost about $600

Today 16GB of memory is about $20.


As far as the Ford Focus...it is built with much closer tolerances today than a Ford in 1953. A car today is expected to go 100,000 to 150,000 miles without a major service. In 1953 you would be lucky to get 30,000 miles before a rebuild.
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Old 09-17-2013, 09:09 AM   #7
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Originally Posted by Amethyst View Post
I I'm sure most folks on this forum would sniff at only doubling one's household income in 18 years. Also, investment income was about half then what it is today, even though we have several times the amount invested that we did in '95.

However, our taxes have more than tripled! Not sure what to conclude from this, other than that government is not a lucrative profession
Amethyst
Yeah... This is why the PCI is confusing, and why the "calculator" doesn't necessarily reflect reality. My calculation was based on putting my (final) 1986 salary, into the CPI calculator. I'm certain that if I were still working, I'd be earning a 7 figure base salary.

The BLS uses the CPI for many official purposes, such as establishing the COLA for SS and many other government calculations. Other sources maintain that the calculations are too low because of methodological changes, such as using hamburg in 2012, instead of steak in (used in1990), because people can't afford steak any longer... It's called "substitution".
Alternate Inflation Charts

Now... what if we were to apply the CPI income increases to the top 1%... let's say since 1990?
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Old 09-17-2013, 12:15 PM   #8
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There's a great-sounding name for this: "Hedonic adaptation." Meaning, you accept less enjoyment over time for the same price, and pretty soon you don't even remember what your expectations used to be. I'm sure we could come up with all sorts of examples of that

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Originally Posted by imoldernu View Post
using hamburg in 2012, instead of steak in (used in1990), because people can't afford steak any longer... It's called "substitution".
Alternate Inflation Charts

?
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Old 09-28-2013, 07:09 AM   #9
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I have spent some time looking at various ways to measure inflation. I found that US Personal Consumption Expenditures Chain Type Price Index YoY SA best fits the costs we are facing. This metric was since 1996

1996 2.12%
1997 1.72%
1998 0.77%
1999 1.48%
2000 2.48%
2001 1.92%
2002 1.34%
2003 1.99%
2004 2.42%
2005 2.84%
2006 2.67%
2007 2.51%
2008 3.04%
2009 -0.05%
2010 1.66%
2011 2.39%
2012 1.84%
2013 1.22%

Deflating my cost using this index pretty much achieves cost stability as our spending has mostly remained the same last few years. If this is the case I think over the next few decades this metric will average around 2.5% looking at long term historical trends. As a results I do most of my planning based on a pessimistic assumption of 3% for inflation.
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Old 09-28-2013, 08:11 AM   #10
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I think that inflation is quite a bit higher than previous years especially what I buy; Fuel, Food, Gas/Electric etc.

They try to think we do not notice but, Shrimp is now sold in 12oz not 16oz packages for MORE or the same money, Cereal similar and Cans of Tuna are now 5oz instead of 7oz. Do the manufactures think we are stupid.....?

This is the REAL inflation for most people not the CPI. Especially us FIRE'd folk.
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Old 09-28-2013, 09:04 AM   #11
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Originally Posted by ShokWaveRider View Post
I think that inflation is quite a bit higher than previous years especially what I buy; Fuel, Food, Gas/Electric etc.

They try to think we do not notice but, Shrimp is now sold in 12oz not 16oz packages for MORE or the same money, Cereal similar and Cans of Tuna are now 5oz instead of 7oz. Do the manufactures think we are stupid.....?

This is the REAL inflation for most people not the CPI. Especially us FIRE'd folk.
+1

With a current empty nest and buying smaller portions, and the ability to control our commutes, DW and I personally don't notice this. But we have friends who are still shopping for 5-6 or more in their household and the increasing food and fuel costs are their biggest issue.
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Old 09-28-2013, 09:34 AM   #12
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....They try to think we do not notice but, Shrimp is now sold in 12oz not 16oz packages for MORE or the same money, Cereal similar and Cans of Tuna are now 5oz instead of 7oz. Do the manufactures think we are stupid.....?....
Perhaps, but I usually focus on the unit prices (price per pound, etc) rather than the price for the package.
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Old 09-28-2013, 10:28 AM   #13
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Originally Posted by ShokWaveRider View Post
I think that inflation is quite a bit higher than previous years especially what I buy; Fuel, Food, Gas/Electric etc.

They try to think we do not notice but, Shrimp is now sold in 12oz not 16oz packages for MORE or the same money, Cereal similar and Cans of Tuna are now 5oz instead of 7oz. Do the manufactures think we are stupid.....?

This is the REAL inflation for most people not the CPI. Especially us FIRE'd folk.
+1 !! Well stated.
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Old 09-28-2013, 03:31 PM   #14
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First, a couple of comments on imoldernu's inflation observations. Two that stand out are medical and higher education. My take is that they are both HIGHLY subsidized by the gummint. We could argue all day about whether that is THE reason that these have gotten out of whack, but I hope we don't have to argue about whether, indeed, these ARE in fact highly subsidized by the gummint (much more so than way back when.)

I think the variability in most of the others are either within the "noise" of 60 years of human experience or else can be at least partially explained. The one I'm a bit puzzled by is the movie ticket price. Honestly, I think that is based on "perceived value". When "big" movies came out in the early 50's (my memory start-time) they were always at premium prices (as much as double). Now, they're ALL "big" (though one could dispute whether many of them are any good or not). Budgets for films have far exceeded the inflation rate, so the "product" may have more perceived value. Just a WAG on my part.

The hamburger example, though not nearly as pronounced, is also (very arguably) due to subsidies by the gummint. Corn (the basic ingredient in beef, heh, heh) used to be $2/bushel (+/-) for many, many years. Once the gummint decided we should be running our cars on bourbon (whoops!, I mean ethanol) corn prices have jumped to $5 to $7 and held there for several years. The gummint puts a floor under ethanol prices which really puts a floor under corn prices. Additionally, the gummint demands that we use 10% ethanol in gasoline which dramatically increases the use of corn for fuel instead of "hamburger". Just a thought on this one, you understand.

As always, YMMV.
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Old 09-28-2013, 08:14 PM   #15
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Originally Posted by Koolau View Post
First, a couple of comments on imoldernu's inflation observations. Two that stand out are medical and higher education. My take is that they are both HIGHLY subsidized by the gummint. We could argue all day about whether that is THE reason that these have gotten out of whack, but I hope we don't have to argue about whether, indeed, these ARE in fact highly subsidized by the gummint (much more so than way back when.) I think the variability in most of the others are either within the "noise" of 60 years of human experience or else can be at least partially explained. The one I'm a bit puzzled by is the movie ticket price. Honestly, I think that is based on "perceived value". When "big" movies came out in the early 50's (my memory start-time) they were always at premium prices (as much as double). Now, they're ALL "big" (though one could dispute whether many of them are any good or not). Budgets for films have far exceeded the inflation rate, so the "product" may have more perceived value. Just a WAG on my part. The hamburger example, though not nearly as pronounced, is also (very arguably) due to subsidies by the gummint. Corn (the basic ingredient in beef, heh, heh) used to be $2/bushel (+/-) for many, many years. Once the gummint decided we should be running our cars on bourbon (whoops!, I mean ethanol) corn prices have jumped to $5 to $7 and held there for several years. The gummint puts a floor under ethanol prices which really puts a floor under corn prices. Additionally, the gummint demands that we use 10% ethanol in gasoline which dramatically increases the use of corn for fuel instead of "hamburger". Just a thought on this one, you understand. As always, YMMV.
Corn was in the $2-$3 range back when I use to read the farm report on the Sat morning radio shift, circa 1973. Certainly land, fuel, equipment, etc. has gone up in the interim. Corn is currently in the $4.50-$5.00/bu. range, though down from as much as $7.63 (record) in 8/2012.

Not sure that's far out of line with the inflation rate of other commodities.
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Old 09-30-2013, 07:55 PM   #16
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The one I'm a bit puzzled by is the movie ticket price. Honestly, I think that is based on "perceived value". When "big" movies came out in the early 50's (my memory start-time) they were always at premium prices (as much as double). Now, they're ALL "big" (though one could dispute whether many of them are any good or not). Budgets for films have far exceeded the inflation rate, so the "product" may have more perceived value. Just a WAG on my part.
Specifically with movies (and perhaps sports, since they are also one of the few holdover forms of entertainment from the past), back in the 50s, your choices for entertainment were few: perhaps a movie, a ballgame, maybe a live band....not as much variety as today to spend your entertainment dollars on.

These days, movies have a larger amount of competition for your time, attention span - and $. As a result, they have to really kick it up a notch with the quality of the product, whether it's special effects, big name actors/actresses, etc.. There's occasionally a hit that made it by on a shoestring budget - but for the most part, studios would rather spend 2x as much to have a relatively greater hope for a decent return on their investment, rather than cutting costs and having a meager film that doesn't draw the crowds.

Not to mention that 'special effects' in the 50s may have amounted to someone holding a bag of fake blood in their shirt, and pulling the plug at the right time to let the blood flow. These days, special effects are much different. (yes, I know that movies like Ben Hur had larger budgets, but overall, there was much less required).

And as movie sales are for a much larger audience (and thus, more ticket sales), big name stars will demand a higher fee/bigger cut of the sales, just as CEOs have larger compensation packages as the companies grow much larger - one of the many components of higher ticket prices.

It's somewhat similar to sports teams, albeit perhaps slightly different. As broadcast revenues increase, sports teams will bid higher for better players for the chance of performing better (and the all important broadcast/ticket revenue from post-season play). As their payrolls increase, they won't likely be freezing ticket/merchandise/food prices anytime soon. And as revenue generation of the teams increases from ticket sales and broadcast revenue, the owners that sell will want a market cap rate for their team (just as real estate owners want a 'market' cap rate for their properties when they sell, regardless of what they paid for them). Not to mention costs of new facilities with increasing lists of amenities (retractable roof, bigger screens, etc.).
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