Six predictions for 2012?

[Koolau]

This is exactly how the government wants us to view inflation, and it's exactly the kind of stuff they do in order to "reduce" the CPI. It doesn't matter if the exact same things cost 10% more than last year -- if they decide it means we will change our consumer behavior and buy cheaper substitutes, they claim there is no inflation.

I'm sorry, but if the exact same basket of goods and services costs 8% more than last year (for example), inflation is 8% -- and I don't care if the CPI uses gimmicks to claim it's 1% because people are buying more chicken instead of beef.

Our personal-consumption (i.e., not housing and big-ticket items) inflation exceeded 10% last year. Yes, that's an estimate, but consider just our health care for a moment. Our previous OOP limit was $2500 and last year it went to $5000 (and we spent every nickel of it both years). Our premiums last year went up significantly as well. Between the escalating costs and shrinking size of food and household goods (have you noticed the size of TP rolls lately) I estimate our food/household purchases inflated well over 10% last year. Our electric rates are now higher than when oil was $150/bbl (and 90% of our electricity is produced with oil). The reason: People have taken HECO's advice and cut back on usage. Now, they have to charge more per KW to come out. (Hey, if the gators don't getcha, the skeeters will). HOA/Maintenance dues are way up (again) due to, oh, stuff like ELECTRICITY.

So, since we have no good idea about how to invest to Whip-Inflation-Now (other than diversify) it means we must implement some of our back-ups. Buy lower quality goods (which probably means DW will still use Charmin while I'll have to use the depleted sandpaper they sell for 1/3 less.) Eat out less often - a "simple, but not easy" solution. Switch to LCD lights every time a sale comes along - oh, we bought some left-over LCD xmas lights a year ago, primarily clear. We now use them for our room lighting when we watch TV. Much more efficient than even our CFLs (a free idea for ya.)

Other than whining, I guess my point is that inflation is already here no matter what our gummint says. I like to think I have enough back-ups built into my plan to make it another 20 or 30 years, but what if we see inflation like we did in the 70s/80s? I don't think they send out Sears catalogs anymore, do they?

 

[DoingHomework]

We don't have wage pressures contributing to inflation. We have the opposite situation.

We have high unemployment.

Capacity utilization is at a very low rate.

Economic growth is lackluster at best.

Demographics are against any substantial increase in demand for decades.

Those traits are not suggestive of inflation. Sure, pumping money into the economy is but so what? The money pumped in is still small compared to the amount taken out by the real estate collapse. A paper loss is being filled by a paper gain.

Commodity prices will probably continue to go up because there are so many more consumers in the world wanting to eat more calories and use more watts for their more western standards of living. That's the only thing I see that could lead to serious inflation in the next couple of decades. In spite of all the hot air, the market expects about 2.5%-3% inflation for the next 30 years based on the TIPS-long bond spread. That's well below the historic trend.

Credit card debt decreased 11% last year. That's huge. Interest rates aren't going to spike when Americans are rapidly deleveraging. There's no demand for money. They are too low to expect any significant additional decrease though. A year from now rates for every time period will be within 1% of where they are now.

What was "the consensus" smoking?

Oh, and S&P500 will hit a high this year in the mid 1400s and close around 1400 or high 1300s. That's based on modest earnings growth and a slight recovery of the PE but still below history. Why would the PE recover? Because European problems will push money to the US and bond returns will be no competition.

All in all, 2012 will be a good year, inflation will be tame, rates will be stable, and stocks will be ok. I don't really see the employment situation improving though.

But what do I know?

 

[Finance Dave]

So me and my finance buddy have been saying this for last 4 years, inflation is going to come back. Hrmmm where the heck is it?

So because this is interesting to me, I have been thinking about inflation and listening to what economists and analysts have to say. Are we wrong that inflation is ready to burst out? One possible outcome I have come up with:

Prices go up because of weakening dollar, due to pumping stimulus noted in #3. Also due to demand for commodities from developing countries. However, what is damaging with inflation is the cycle of higher prices and then wages go up in response, then prices go up in response then wages go up... you get the point. The damaging thing is the sprial of prices and wages fighting each other.

What if prices go up but wages can't because of 6Million folks looking for jobs? Then we could see 3-4% price inflation for a number of years, not fun for folks that don't keep up with wage increases or fixed income that don't have an escalation clause (pensions without cola or self funded retired that don't have investments that respond to inflation), but it doesn't put us in the inflation sprial we saw in 80's.

So I know that if we see traditional inflation, buy assets that will keep up with inflation (gold, realestate, diamonds, food under the bed) as bonds and equities don't do well in relation to inflation.

However, what if we have moderate inflation that the Fed can't or won't stop, because we as a country have to inflate our way out of the debt, we can never repay it with some moderate inflation. What can you do with your hord of cash to protect from that? The only thing I can think of now is we have borrowed $$ to buy rental realestate at today's low rates being convinced the 4% fixed rate money we owe today will look like gold when inflation kicks in.

Thoughts

Ladder short-maturity accounts. As inflation increases, interest rates will increase, and you can participate in those higher rates.

 

[DoingHomework]

Then why are prices rising so much, at least for "essential" categories like food, energy, health care, insurance and education (among others)?

Food: Some of it is competition from corn being turned into ethanol, some is increased demand from improving diets around the world.

Energy: Instability in the ME and increased demand from developing countries.

Health care: Inefficiency and incompetence on so many levels.

Insurance: If the price of the underlying asset increases then so will coverage.

Education: State governments are scaling back subsidies. Plus student loans are so easy to get that the increase in supply of students supports higher prices.

I've tracked my expenses with Quicken for at least 14 years and with another program before that. I have not experienced the inflation that everyone talks about. My expenses have been nearly flat for the last 6 years. My homeowner's insurance has gone up 2.1% per year in the last 20 years despite having inflation coverage and insuring a house that has more than tripled in value. Sure, a few categories have gone up faster but some have decreased. We eat out more so that has gone up but out grocery costs have gone down. There are things we no longer buy because we already have but we spend more on vacations and other stuff like that.

I'm sure everyone has a different experience. But I have a hard time seeing the hyperinflation that some people get so excited about, now, in the past couple of decades, or in the next couple.

 

[marko]

What does the reference to "AA" stand for? I assume it refers to your investment portfolio. ( I know that once I hit "post reply" it'll come to me!)

 

[REWahoo]

"AA" = either Alcoholics Anonymous or Asset Allocation. Your choice.

 

[REWahoo]

Marko, this might be of some help: http://www.early-retirement.org/for...slang-frequently-used-on-the-forum-34884.html

 

[marko]

As Napoleon Dynamite might say: "Gosshhh, what an idiot!"

Thanks folks.

 

[audreyh1]

Then why are prices rising so much, at least for "essential" categories like food, energy, health care, insurance and education (among others)? I agree that wage pressures are nonexistent -- but that hasn't stopped prices for most essential items a working class family has to purchase.

The textbooks would look at our situation and suggest there should be little or no inflation. And that is true for housing, for wages and for some big ticket "discretionary" items.... but is definitely *not* true for the essential things that dominate a modest budget.

DoingHomework answered some of this. But the main reason food inflation was so strong in 2011 was weather problems in several countries around the globe caused a shortage in world grain (corn/wheat) supply. This affected meat prices as well as other agricultural commodities.

Hightened oil prices also had an effect, again this impacts most crops. Higher oil prices were mainly due to political instability in the Middle East.

I suspect the major drought in the central/southern US also drove up US meat prices as not as many animals could be raised.

There were other constant global pressures that did not let up - increasing world population; world populations buying more expensive foods; increasing percent of grains used for biofuels.

It's worth noting that food inflation was flat for 2009 and 2010. It dropped slightly in 2009, and only went up a little in 2010.

Insurance and education are in their own little worlds in terms of increasing prices. Apparently competitive pressures are almost non-existent in those areas.

Audrey

 

[Nords]

Does anyone's actual personal inflation rate come close to 3.5% over a long term? Once you have no mortgage and assuming you continue to LBYM, I can't imagine the cost of living doubling in 20 years. Insurance will cost more, but we'll have medicare. Gas will cost less, but we'll drive less. Food is one item that will probably go up, but I hear we don't eat as much when we get old.
If what one needs to live on doubles over the next 20 years, I know a lot of people who may have to get by on half as much.

Aw, man, don't let that secret get out or everyone will be trying to LBYM and cut their inflation rates...

BTW a fixed-rate mortgage lets you pay off your debt with steadily smaller dollars.

 

[traineeinvestor]

Leaving aside questions about whether the official CPI numbers are a reasonably proxy for personal rates of inflation (for our household they are not), those thinking of retiring overseas might want to look at the CPI numbers for their intending retirement location: Inflation, List by Country

Its also worth bearing in mind that in a lot of the countries experiencing high inflation, basic necessities like food and transport make up a much higher percentage of the "basket" used to compile the index.

As a question, if so many countries around the world experience high inflation, how confident are we that the developed countries that we live in will not experience high(er) inflation in the future? We have in the past (e.g. 1970s) and in the course of planning for a 40-50 year retirement IMHO it would be dangerous to assume that we will not have a similar experience again.

Given the current macro environment, I wouldn't expect it anytime soon (famous last words), but the possibility of encountering a period of several years of high single digit inflation (or worse) is a serious worry for those of us living in places where TIPS or equivalent are not available.

 

[marko]

Aw, man, don't let that secret get out or everyone will be trying to LBYM and cut their inflation rates...

BTW a fixed-rate mortgage lets you pay off your debt with steadily smaller dollars.

So, should there be a separate 'inflation rate' for retirees? I always assumed that expenses just shifted to other areas but now you've got me thinking.......hmmmmm.

Of course, just moving 30 miles from Mass. to NH (or better yet, FL) would save me about $5K a year in taxes alone, but that's another story for another day.

 

[marko]

Leaving aside questions about whether the official CPI numbers are a reasonably proxy for personal rates of inflation (for our household they are not), those thinking of retiring overseas might want to look at the CPI numbers for their intending retirement location: Inflation, List by Country

Its also worth bearing in mind that in a lot of the countries experiencing high inflation, basic necessities like food and transport make up a much higher percentage of the "basket" used to compile the index.

As a question, if so many countries around the world experience high inflation, how confident are we that the developed countries that we live in will not experience high(er) inflation in the future? We have in the past (e.g. 1970s) and in the course of planning for a 40-50 year retirement IMHO it would be dangerous to assume that we will not have a similar experience again.

Given the current macro environment, I wouldn't expect it anytime soon (famous last words), but the possibility of encountering a period of several years of high single digit inflation (or worse) is a serious worry for those of us living in places where TIPS or equivalent are not available.

I'm not looking forward to high inflation, but if I remember correctly, during the high inflation 70's you could get CD's paying 15%. Sure, that just kept up with the inflation but for a few years you could almost double your money on CDs and then when inflation cooled you had a nice stack of cash!

 

[eytonxav]

I've tracked my expenses with Quicken for at least 14 years and with another program before that. I have not experienced the inflation that everyone talks about. My expenses have been nearly flat for the last 6 years. My homeowner's insurance has gone up 2.1% per year in the last 20 years despite having inflation coverage and insuring a house that has more than tripled in value. Sure, a few categories have gone up faster but some have decreased. We eat out more so that has gone up but out grocery costs have gone down. There are things we no longer buy because we already have but we spend more on vacations and other stuff like that.

I'm sure everyone has a different experience. But I have a hard time seeing the hyperinflation that some people get so excited about, now, in the past couple of decades, or in the next couple.

Wow, I wish I was able to hold it down like that. Don't you consume gasoline, have healthcare insurance or have any college tuition to deal with in your household. Here in Texas, also seeing large increases in water bill.

 

[MichaelB]

Excellent reading for anyone interested in 2012 forecasts and predictions Investing in 2012: Get ahead of forecaster folly - The Washington Post

These are my 10 forecasts as to what the forecasters will be forecasting for 2012:

Stocks will trounce bonds
Housing has bottomed
Election forecasts
The economy is better than the data suggest
The apocalypse is coming
Banks will come roaring back
Hyperinflation
Buy gold
Buy emerging markets

 

[eytonxav]

Excellent reading for anyone interested in 2012 forecasts and predictions Investing in 2012: Get ahead of forecaster folly - The Washington Post


Stocks will trounce bonds
Housing has bottomed
Election forecasts
The economy is better than the data suggest
The apocalypse is coming
Banks will come roaring back
Hyperinflation
Buy gold
Buy emerging markets

When I was scanning your list, I thought you would tell us who will win in November

 

[REWahoo]

Here's my favorite:

The Apocalypse is coming! ... Yes, we know, the end is near. You tell us this year after year, and it is terribly tiresome. After the Apocalypse, you have full license to say “I told you so.” Until then, please go away.

I may ad this to my sig line..

 

[HFWR]

"AA" = either Alcoholics Anonymous or Asset Allocation. Your choice.

I'm a member of Alcoholics Unanimous...

Granted I don't track as closely as some, but my expenses have been relatively stable for 10+ years...

 

[Koolau]

Wow, I wish I was able to hold it down like that. Don't you consume gasoline, have healthcare insurance or have any college tuition to deal with in your household. Here in Texas, also seeing large increases in water bill.

Or state taxes (income bracket creep and sales tax increases)?
Or property taxes (rates AND increasing assessments)?
Or tires?
Or movie tickets?
Or air travel (including "fees" for baggage?
Or LTC insurance?
Or car batteries?
Or car repairs?
Or auto license "fees"?
Or milk?
Or canned/bottled soda?
Or professional services (attorney, tax professional, etc.)?
Or Dinty Moore beef stew
Or TP?
Or a bus ride?
Or etc.? etc.?

I know that each of us has a different "market basket" which can affect our personal rate of inflation. But I find it difficult to believe that there are any more than a few who have not experienced "noticeable" inflation of late. I won't dispute anyone's figures. They are what they are. Still, I go to almost any store and recall lower prices on MOST things a year ago. Don't have the figures to back that up, but on things I "need", it is most noticeable even if I haven't tracked it to the penny.

I'm truly happy for DoingHomework who's tracking of expenses indicates personal inflation to be in check for many years. (I'm only mildly jealous.) Still, I wonder if D.H. has made subtle changes (e.g., chicken vs steak, one car instead of two, warmer AC, cooler heating, Goodwill instead of Pennys, etc. etc.) without recognizing the "quality" issue that sometimes is talked about in these discussions. Absolutely no criticism intended, just personally do not see inflation as anything other than a current AND looming problem (to me). I do think inflation is more noticeable to those of us already retired and not in a position to increase our incomes via w*rk. YMMV

 

[DoingHomework]

Wow, I wish I was able to hold it down like that. Don't you consume gasoline, have healthcare insurance or have any college tuition to deal with in your household. Here in Texas, also seeing large increases in water bill.

Ok, maybe I'm cheating. My 2007 car has less than 20000 miles on it. I live very close to w*rk and, though sometimes I walk or bike I usually drive. But the miles don't add up much. It's a gas guzzling SUV but I hardly notice.

My health insurance is paid mostly by my employer. I pay the same that I paid in the early 90s. They pay more but not by as much as people say. I left this employer in the early 90s and paid their share as I COBRA-ed. It was about $1200 a month for my wife and I. The full cost to do the same now would be $1600 a month, a 33% increase in ~17 years. But I don't dispute that health care inflation has been very high. My employer is huge and negotiates aggressively. I work for a state university.

College tuition - not so much. But I'll comment on that in another thread.

 

[DoingHomework]

Still, I wonder if D.H. has made subtle changes (e.g., chicken vs steak, one car instead of two, warmer AC, cooler heating, Goodwill instead of Pennys, etc. etc.) without recognizing the "quality" issue that sometimes is talked about in these discussions.

I'm sure I've made subtle changes, and I wasn't bragging. I was just commenting that I truly have a hard time seeing the rampant inflation that some people talk about. I know somethings have certainly gone up but many things have not.

We eat very little meat or processed food. A bag of chicken breasts lasts us a month or more. I haven't paid close attention but that bag might have gone from $6 to $7 in the last 7-8 years, which is consistent with 2-3% inflation. We don't eat steak but we do eat fish. Our veggies might have gone up a little, it's hard to say. What I can say for sure though is that our overall grocery bills have not gone up, that we do not skimp on buying what we like, and we're clearly getting enough calories because we need to go to the gym a lot more. Oh, and the gym was $55 a month in 2002 and is now $62 - an annual increase of 1.2%.

Still drive 2 cars, keep the heat up, and shop where we please.

I think the biggest factor is that we have most of what we need so we don't need to buy very much. That doesn't come from being frugal. Twenty years ago we had to buy a new appliance every time we needed something. But now we have all the stuff we end up needing.

I don't put much more faith in the government numbers than most people. My point is not that they are right. My point is that I think inflation for most things is highly personal. I have no doubt that when we ER and move to Hawaii that our "inflation" will be very high for a few years as we adjust to higher food costs, replace things that it didn't make sense to move, etc. But we'll be saving money on sweaters and heating so who knows. We already spend time there and have a place so we're not totally ignorant about what the costs will be.

 

[DoingHomework]

When I was scanning your list, I thought you would tell us who will win in November

It will be a guy that about half the people are unhappy with, no one fully believes, and will get very little done.

 

[DoingHomework]

Insurance and education are in their own little worlds in terms of increasing prices. Apparently competitive pressures are almost non-existent in those areas.

I work at a state university. Here's my take on what is happening with education inflation.

Obviously the cost of tuition has gone way up in the last 25 years. The reasons probably matter very little to current students or their benefactors paying the bills. But the costs for universities have not actually been increasing very fast. The CPI is probably a good estimate for that. Costs are essentially the faculty and staff, utilities, and buildings. Those all track inflation reasonably well. Professors at my school do not make more, adjusted for inflation, than they did 20-30 years ago.

What has changed is the subsidy provided by the state. The Arizona Constitution requires the legislature to make university education "as nearly free as possible" to all residents of the state. You can argue with whether that should be the case but the fact is that it is. But the legislature recently, over the last couple of decades but especially in the last 10 years has focused on the "nearly" part and has increased the share that students must pay. The state used to pay 80-90% but it is now way down, possibly around 25%. So much of the "inflation" is simply a shift in who pays.

The way this is done though is concealed in some fancy accounting so that it does not look like the politicians are cutting funding.

Another factor is student loans. When the government makes loans easy to get by guaranteeing them, and through various other policies, students have the money to pay inflated tuition. Artificially created supply of students drives up prices. And it's a vicious cycle because the for-profit schools that compete with state schools can then make more money and that often leads to other problems.

If a kid has to work hard to pay $800 a semester at a state school, that's puts an economic barrier on who can afford the state school and it limits what a for-profit school can charge. Who would pay $2500 for a for-profit place when the state gives it to you for $800?

But give the kid $10000 in loans, raise state tuition to $4000 and you get a situation where every kid wants to go to school and for-profit schools can make a good profit by charging the same $4000.

Don't get me wrong, I'm all for everyone having an opportunity to better themselves and get an education. But I think the current situation is terrible. Taxpayers are being ripped off, students are being ripped off and put in financial shackles even if they manage to graduate, and society is really not benefiting from the improved human capital that the whole concept of state schools is premised on.

I don't know what the solution is. But my point as it applies to this thread is that tuition is going up because of a shift in who pays and there are loans available to offset the higher fees, as bad as that is. Once students are paying the full cost, I think it is unlikely that tuition will continue to increase at the rate it has.