Interesting! - My personal rate of inflation has dropped!

[justin]

Originally Posted by BigMoneyJim

I'm not sure what CPI is, but I noticed last Februrary that my "merit increase" didn't cover my lunches. The "cheap" mexican food place jumped a dollar or two per meal. That didn't even factor in that gas had shot through the roof. Over the past two years my salary has shrunk in real terms.

I feel your pain, bro. The local cheap mexican restaurant went from $4 to $4.25 this past year. That's a freaking 6.3% increase! In the meantime, my salary has only increased 2.1% since my hire two years ago. Where am I supposed to get that extra $0.25 from ($0.28 after taxes)? I'm gonna have to start hedonistically adjusting some of those free chips and salsa into my pockets for my afternoon snack to make up for the price increase.

[youbet]

Originally Posted by BigMoneyJim

Over the past two years my salary has shrunk in real terms.

Yep, mine too.

There does seem to be some confusion in the thread concerning the difference between inflation and your personal budget.* Inflation impacts our personal budgets when goods and services we purchase increase in price.* We can sometimes compensate by buying less or by buying substitute goods and services.* Typically, planning budgets for a long retirement involves both buying less and finding lower cost substitutes in order to reduce the impact of inflation.*

[Jarhead*]

Originally Posted by Cut-Throat

My personal rate of inflation actually dropped!

Cutthroat: How about workers comp. for your Butler? (I'd be surprised if that didn't go up).

[d]

confusion ... concerning the difference between inflation and...

there are three different but related concepts ... inflation, cost of living, and standard of living. If we buy Q units of "stuff" and price P ... inflation references change in P, cost of living references PxQ with Q held constant, and standard of living references Q

[work4beer]

Well, there was an article at Kiplinger's about calculating your personal CPI:

http://tinyurl.com/nnzu4

By adjusting for how much YOU spend in the various CPI categories, you can adjust accordingly. Mine came out to 2.08% or 2.82%(*) vs. the official 3.2%. In the two big categories, I spend almost nothing (medical care) and less than average (transportation).

This assumes that my market basket matches the gov'ts. Probably not true. But it at least gives you a rough idea of where you're at vs. the official stat.

(*) 2.08 vs. 2.82% depends on what you do with mortgage payments. If you include them in the housing component, I get 2.82%. If you include them seperately as a 0% increase (fixed mortgate) I get 2.08. I plan on staying here for a long time, so that seems realistic. The fact that my house value (or even equivalent rent) has doubled in 6 years doesn't mean my expenses have doubled.



EDIT: Shortnened URL

Originally Posted by mathjak107

a lower rate of inflation isnt lowering our living standards or substituting cheaper products or doing with out....your fooling yourself....dont forget all the things you get that are less than at the same price..a pound of coffee is 15 oz,,,hersheys kisses shrank 2 ounces to the bag...yogurt went from 8 to 6 ounces.....dont forget all the things your paying for and not getting in the service sector...any layed off gov't workers? did they refund your taxes that were paying for them?....you get the idea!

I bought a 25 inch color TV in 1972 for $600. Going by your logic, a 25 inch Color TV today should probably cost about $5,000. Quit fooling yourself!

[kramer]

Most economists that I have read that have carefully studied the CPI seem to believe that it overestimates inflation slightly. And that the problem will gradually get worse as a wealthy society like the US provides an expanding number of product choices that differ by quality in a fine-grained manner.

One issue is that the standard of living for everyone goes up over time. And although you are living more comfortably, it still can cost a bit more to live (even if the purchase of that extra comfort was an absolute bargain). You can't get non-potable tap water in the US anymore, you can't get a brand new house not built to earthquake standards near a fault, you can't buy a new car that will statistically poop out at 70K miles, and you cannot purchase 1970s quality medical care. This is one reason why it is "cheaper" to live in a 2nd/3rd world country -- these sorts of things truly are optional there.

If not for this staircase of higher quality over time, it would be cheaper and cheaper to live relative to the CPI.

As an example, if you research the BLS site, over the last 10 years the CPI for medical component has been something like 6% inflation, when in reality private insurance costs for a fixed age person probably been closer to 10% for a middle aged worker according to research I have read (and they count as part of your salary your employer's contribution to your insurance in the Medical CPI). The medical number is lower that reality partly because of increased government spending in Medicare/medicaid (government buys half of all medical care in US now) and shields many from price increases. But the main reason is because people are getting more and better medical care, and they purposely exclude this aspect from the CPI (the BLS site specifically states this in the medical care section).

Blog entry that compares 1975 and 2006 prices and seems to show how the CPI actually overstates inflation:

http://cafehayek.typepad.com/hayek/2...g_for_sea.html

http://cafehayek.typepad.com/hayek/2..._sears_ca.html

Also, as others like CFB and SG on the earlier thread said, you need to carefully evaluate your personal situation. For instance, the medical CPI assumes you are a fixed age, but even in the complete absence of medical inflation, your medical costs as an early retiree will increase because of your increasing age. And it could be that since you are not in an employer risk pool you are more subject to the vicissitudes of the marketplace and more prone to insurance premium extremes, raising your risk.

Kramer

[kramer]

Follow up -- here is how I apply the thinking in my last post to an early retirement.

As I stated, I believe that the CPI slightly overstates inflation.

So I assume that I will "keep up" with the Jones' in early retirement, by keeping non-medical spending during early retirement constant with respect to CPI, and I track medical spending separately at higher inflation component.

This approach gives a fudge factor, because the CPI would be much lower without the medical component (well, about 0.5% lower, if memory serves), and if you believe like I do that the main CPI figure already overstates inflation, then this allows you to keep up with the neighbors, so to speak, whose standard of living is increasing. As I mentioned above, even if you are frugal LBYM, there are certain increasing expenses you cannot (nor do you want to) avoid in a society whose standard of living is increasing like the US. I figure this gives me at least half percent margin per year over a true fixed standard of living -- this is 16% after 30 years -- and maybe up to 1% per year -- this is 35% after 30 years.

On the medical part, I separate it out and increase it by about CPI + 8% or so until age 66. This accounts for my increasing age in retirement, as well. And I assume some extra costs over present-day medicare in retirment, more than someone would pay nowadays. (of course, if you get sick, your travel costs may decrease, etc.)

I have an escape valve in that if medical gets too high, I am outta here (USA).

So to summarize, for SWR, I just assume all expenses increasing at CPI, except medical insurance, which I assume at about CPI + 8%.

When I did all the math in a monte carlo engine for mid-40s retiree, this dropped SWR by about 0.4%.

If you have a larger margin at retirement and thus health costs are lower percentage of your initial withdrawal, you have much less to worry about than a barely marginal retiree, who will be affected disproportionately by medical inflation.

Kramer

ps: I am reading Robert Fogel's treatise (he is nobel laureate) on standard of living -- Escape from hunger and premature death: 1700-2100 -- and you can expect medical costs to continue to increase, not because of inflation, but because more and more treatments are coming on-line and this is a rational way to spend money. in fact, just today, annual government study came out and reported astonishing decrease in number of US deaths last year. life expectancy increased by 0.5 years in last 2 years. btw, at turn of 19th century, folks spent 1% of income on medical care. we live in an amazing time of astonishing equality -- used to be more than 10 years difference in lifespan between upper and middle classes.

[mathjak107]

Originally Posted by Cut-Throat

I bought a 25 inch color TV in 1972 for $600. Going by your logic, a 25 inch Color TV today should probably cost about $5,000. Quit fooling yourself!

wrong ....in 1972 a color tv was considered a fairly hi-tech cutting edge of technology item...my sony xbr in 1987 was around 750.00..that represented the cutting edge of sony technology...today sony's xbr set is 2200.00.....................
a cd player in the 70's cost me 1,000...even the most basic player was new cutting edge technology....while today a cd player can be bought for 50 bucks the top of the food chain in cd players with the latest technology is around 3000 plus..............
its like saying a 1987 caddy is bettered by a ford taurus today but a caddy owner aint buying a ford taurusif he wants state of the art in american cars

todays cutting edge in tv,s is plasma..guess what ? a good plasma is still 4-5,000...........

[mathjak107]

Originally Posted by d

there are three different but related concepts ... inflation, cost of living, and standard of living. If we buy Q units of "stuff" and price P ... inflation references change in P, cost of living references PxQ with Q held constant, and standard of living references Q

i looove it....you are soooooooooo correct.i never thought about this before..thats why we all argue over this but the truth is we are arguing 3 different parameters all rolled into 1 word:inflation....you can see how inflation is the same for everyone in a geographic area period....
how much of these price risen goods and services you use is another factor.
and standard of living is another issue...my buddy at work lives on .99 cent frozen dinners for lunch every day and says inflation isnt to bad....thats living standard..

thanks d...it was a brilliant enlightning

[mathjak107]

it comes down to you cant compare prices on items of the past without comparing where in the food chain those items were based on technologyof that day ,reliability and overall status level and then carry that over to todays equvilent products but keeping the same level of up to the minute technology,state of the art and status level....living standard is a big factor

Originally Posted by mathjak107

it comes down to you cant compare prices on items of the past without comparing where in the food chain those items were based on technologyof that day ,reliability and overall status level and then carry that over to todays equvilent products but keeping the same level of up to the minute technology,state of the art and status level....living standard is a big factor

Absolute Nonsense! - By your method inflation would be impossible to measure. Inflation is NOT about inflating your standard of living.

From Wikepedia:

When the CPI was first created, this was an Arithmetic_mean of the prices in the basket of goods but when Alan_Greenspan was chairing the Federal_reserve the CPI changed to a Geometric_mean which reduces the weighting of goods that are rising in price. This price level is then adjusted for changes in the underlying basket of goods, a process called hedonic adjustment. For example, if the base model of a car goes up in price but includes air conditioning, the price put in to the index will be adjusted down to account for improved model despite the fact that the consumer must pay for it whether the feature has value or not.

[mathjak107]

inflation as "d" taught us is only a price change,,,then theres cost of living which is quantity of items at that price you use and the last part of the personal index is standard of living...if you enjoy the best of breed and keep current with technology its still just as expensive....

[mathjak107]

just happened to read something pertaining to law enforcement agencys here in new york as passed down by the supreme court..
tell me this isnt like our cpi index

the supreme court has ruled that the police departments have no obligation to protect us individualy ,but they do have to protect society at large.......

there we go,,,the cpi applys to everyone but it applys to no one..........

[astromeria]

Originally Posted by mathjak107

the supreme court has ruled that the police departments have no obligation to protect us individualy ,but they do have to protect society at large.

WHAT?!?!

[mathjak107]

what? which part dont you get?

[rickier55]

This, at least most of this, has been interesting. I've been tracking our expenses for 10 years. (trying to get a handle on what would be needed for retirement). This wasnt to make a "budget" so much as to simply find out over time what we should expect in retirment.

During this 10 year period, the annual increase has been negative for 3 periods, and over 10% for 2 of those periods. Last year, it was 7.59% (I had expected it to be a bit high because of some planned expenses).

For the entire period, it averages 5.45% (not compounded)

R

[Nords]

Originally Posted by mathjak107

what?* which part dont you get?

Mathjak, I think you'll get a lot farther with this discussion by including a link to the Supreme Court decision instead of attacking the poster.

[mathjak107]

See, for example, Riss v. City of New York, 22 N.Y.2d 579, 293 NYS2d 897, 240 N.E.2d 860 (N.Y. Ct. of Ap. 1958


that it is a "fundamental principle of American law that a government and its agents are under no general duty to provide public services, such as police protection, to any individual citizen only society at large."


that was no attack,,,i wasnt sure what was being questioned..the topic after all is the cpi index....

[astromeria]

Originally Posted by mathjak107

See, for example, Riss v. City of New York, 22 N.Y.2d 579, 293 NYS2d 897, 240 N.E.2d 860 (N.Y. Ct. of Ap. 1958

OK, I found this:
http://www.user.fast.net/~behanna/kasler.html

When I read your first post referring to this decision, I wondered if I frantically called the police because I (an individual) was under attack, they could maybe just say Bite Me--because it's an individual's problem and not society's. Apaprently that has happened (see link). Yikes.