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Quick Inflation Question
Old 04-16-2019, 01:45 PM   #1
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Quick Inflation Question

So this question should 1) be quickly settled and 2) further display my notorious blind spot when it comes to math.

Let's say I started with $100K 10 years ago and have now doubled it to $200K.
I know I'm ahead of inflation but can't figure out by how much I'm ahead. (grammar seems to be a challenge as well)

An inflation calculator says that $100K 10 years ago now requires $118K to have the same purchasing power. Ok; got that.

Does that mean that my $200K today only has $182K of purchasing power (18-200)? Or does it mean that my gain is really $182K? Or....?

I know I'm looking at this the wrong way here and yes, I am a simpleton on these things. Bottom line question, how do I know my actual gains are keeping up with inflation and by how much?
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Old 04-16-2019, 01:50 PM   #2
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your 200k has 200/118 of the 10 year old purchasing power

your gain over inflation is 200-118 = 82k
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Old 04-16-2019, 01:55 PM   #3
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Or another way of looking at it might be that since the cumulative inflation over the period was 18% and your gain was 100%, your gain was roughly 5.5 times better than inflation (100/18).
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Old 04-16-2019, 02:14 PM   #4
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7.17% turns into 5.31% after accounting for inflation.



Looking at this diagram, you can pull off two numbers...one from the point of investment and one from now: 213.24 and 254.202. It's the ratio between those two numbers that lets you inflate.



You've got $200K in today's dollars in your hand. 10 years ago the $100K was worth MORE if measured in today's dollars, so set up the ratio 254.202/213.24*100 = $119.209. So it's as if you invested $119.209K to get $200K.


So in a spreadsheet, you put a column of dates (4/16/2009, 4/16/2010, ..., 4/16/2019). Next to the 2009 entry, put -119.209. Next to today's entry, put 200. Then type "=xirr(" select the column of dollar values, then "," select the dates, then ")". You'll see 0.0531, or 5.3%.
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Old 04-16-2019, 02:48 PM   #5
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Your $200k is equal in purchasing power to $169.5k of purchasing power 10 years ago.... $169.5k * 118/100 = $200k.

Or put another way... your nominal return ($100k doubling to $200k)... is 7.18% and inflation (needing $118k to buy what $100k bought 10 years ago) was 1.67%.... so your real rate of return was 5.51%.
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Old 04-16-2019, 03:30 PM   #6
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Originally Posted by pb4uski View Post
Your $200k is equal in purchasing power to $169.5k of purchasing power 10 years ago.... $169.5k * 118/100 = $200k.

Or put another way... your nominal return ($100k doubling to $200k)... is 7.18% and inflation (needing $118k to buy what $100k bought 10 years ago) was 1.67%.... so your real rate of return was 5.51%.
Make that 5.42% instead, given the above numbers.
Real return % = [(1 + Nominal return %)/(1 + inflation %)] - 1
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Old 04-16-2019, 03:37 PM   #7
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Agreed.... I was trying to make it simple for the OP by just subtracting inflation from nominal.
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Old 04-16-2019, 06:09 PM   #8
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Originally Posted by braumeister View Post
Or another way of looking at it might be that since the cumulative inflation over the period was 18% and your gain was 100%, your gain was roughly 5.5 times better than inflation (100/18).
Thanks to ALL! Very helpful but I think the above example suits my needs (and abilities) the best. I can easily look up the inflation over a period of time online and then calculate my gain.

Right now it looks like I'm running about 3X better than inflation since incept, which I believe tells me that it answers the "am I running out of money despite positive gains?" question.
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Old 04-16-2019, 11:26 PM   #9
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marko ,

having lived in a time of high inflation ( when my property mortgage was 17.5% )

i prefer to keep a very watchful eye on inflation ( like you would for a sleeping crocodile )

being ahead of inflation currently is nice ( and good for you at succeeding )

but inflation is only one nasty accident that can happen to your spending power ( the other is asset price collapse , ie. shares , property prices , etc. )

inflation is slower than a major meltdown , but can be just as nasty but longer lasting

debt can be very nasty if inflation takes hold ( as credit usually tightens in tandem )
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Old 04-17-2019, 06:36 AM   #10
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When I look at how our net worth is tracking inflation I just look at the cumulative numbers as I don’t care about annual performance (unless you take into account inflows from other income sources and outflows/spending you aren’t getting investment performance numbers anyway). So it’s quite simple.

In your example, you are up 100%, inflation is up 18%, so you are 82% over where inflation was for the period.

If your portfolio had been $118K you would be breaking even with inflation. That’s the bar you are trying to meet.

If you are trying to compare your purchasing power today versus 10 years ago, $1 10 years ago takes $1.18 today. Conversely $200K divided by 1.18 gives you your the equivalent purchasing power 10 years ago: ~$169K
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Old 04-17-2019, 06:52 AM   #11
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Originally Posted by audreyh1 View Post

In your example, you are up 100%, inflation is up 18%, so your inflation adjusted gain is 82%.

If your portfolio had been $118K you would be breaking even with inflation. Thatís the bar you are trying to meet.
As always, thank you!

My question here was spurred by your reply to me in another thread where my gains were good but you questioned how 'good' against inflation. With a tripling over 15 years, I wasn't worried about it but nice to understand it better.

Still learning something new every day here.
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