Inflation: Does it really matter?

[Mary_From_Georgia]

I'm not a financial guru at all. If you maintain a healthy lifestyle and LBYM, shouldn't "inflation" be a non-issue for you?

I hear all of this stuff about cost of goods index, etc. I simply buy the stuff that is healthy for me, on sale, and manage to find ways to save in my annual living expenses all of the time. Sure, there will be allocation shifts, but I just don't get it...this thing everyone panics about called "inflation".

In fact, is the concept "inflated"? *no pun intended*

Mary

 

[GatorBuzz]

In my opinion, if you are extremely frugal and LBYM, it is less of an issue but it is still an issue nonetheless. Electricity, insurance, gas, and many other things go up and there are no TJ Maxx's where you can get these things. A lot of people are scarred by the 1970's inflation and it scares the heck of them (and for good reason). I was a kid in the 70's, so that fear isn't as ingrained in me, but I still understand the implications of another 70's inflationary period and we would all be wise to appreciate that the possiblity of something similar is real.

 

[TromboneAl]

Makes no difference what you buy, tofu or Hagen Daz, if the prices are going to rise over time, you must make sure that your investments rise enough to keep pace.

If you live a healthy lifestyle, it's more of an issue, because you're more likely to live longer.

 

[Webzter]

You need to worry about your personal rate of inflation, not the CPI. The price of goods you buy still go up, but might trail or lead the average. For instance, if you drive more than most, you'll notice a gas price jump more than most. If you eat whole grains and meat more than veggies, then you might notice a sharper price jump at times. If you buy on clearance, you might never notice a clothing price increase.

 

[Mary_From_Georgia]

Makes no difference what you buy, tofu or Hagen Daz, if the prices are going to rise over time, you must make sure that your investments rise enough to keep pace.

If you live a healthy lifestyle, it's more of an issue, because you're more likely to live longer.

I see your point, but think it does make a difference in what you buy. Without going into all of the intermediate scenarios, I'll fast-forward to what I'd call an extreme.

I'm a country gal that grew up in rural GA. I could easily go back to my hometown and live happily ever after---raise my own chickens and dart into the city when I needed a "rush" if it came to that. In fact, I'm confident I could do so anywhere.

 

[brewer12345]

I see your point, but think it does make a difference in what you buy. Without going into all of the intermediate scenarios, I'll fast-forward to what I'd call an extreme.

I'm a country gal that grew up in rural GA. I could easily go back to my hometown and live happily ever after---raise my own chickens and dart into the city when I needed a "rush" if it came to that. In fact, I'm confident I could do so anywhere.

Hmmm, checked the price of chicken feed lately? Would that plan include going without health insurance? Gasoline? Electricity?

But its a silly thing to debate when it is relatively easy to invest in stuff that keeps up with inflation.

 

[Nords]

Welcome to the board, Mary.

Gosh, were you using money in the late 1970s/early 1980s? At one point I had a checking account paying 10% interest. No one invested in stocks because they were losers-- we put our money in gold, diamonds, collectibles, and other hard assets that would "beat" inflation. Doesn't take too many of those years to ruin a retirement portfolio.

I see your point, but think it does make a difference in what you buy. Without going into all of the intermediate scenarios, I'll fast-forward to what I'd call an extreme.

Hawaii's egg farmers are almost completely out of business due to the rising cost of chicken feed. Feed ingredients & supplements have risen in price and shipping costs have skyrocketed. It's cheaper to ship the finished product (eggs) to Hawaii than it is to ship the raw materials.

Everyone understands problems that take large bites out of their portfolios. However very few appreciate the corrosive effects of annual fees and inflation, which work in very small cuts over many years. So do the math. It doesn't care how we feel about inflation.

Take a look at the costs expected to make the biggest difference in your budget-- health insurance and real estate. Doesn't matter how well you shop for food or how long you keep your car if your medical costs rise 15% per year. And FWIW Joe Dominguez lived arguably one of the world's healthiest lifestyles yet still ended up battling cancer, which severely affected his budget.

Or presume that you can beat "average" inflation by inspired shopping for your consumables. Perhaps you'll beat the 3% average by 1% and only experience an annual overall 2% inflation rate. Over 40 years you'll still see prices more than double, but at least you didn't see them triple.

 

[Sam]

Inflation is real, no matter how you live. Welcome, by the way.

Or presume that you can beat "average" inflation by inspired shopping for your consumables. Perhaps you'll beat the 3% average by 1% and only experience an annual overall 2% inflation rate.

Yes. You would be in excellent shape if you can do this. A few people are even able to beat it by 2%, but that's the exception rather than the norm.

 

[Rich_by_the_Bay]

I'm a country gal that grew up in rural GA. I could easily go back to my hometown and live happily ever after---raise my own chickens and dart into the city when I needed a "rush" if it came to that. In fact, I'm confident I could do so anywhere.

I wonder if you are confusing having enough cushion to handle inflation happily, versus whether inflation matters. By "cushion," I'm referring to having more money that you need to live comfortably, or the willingness and ability to live smaller and cheaper. Either one will buy you time against inflation.

IMHO, it matters a lot. Things basically double in cost every 20 years or so, with periods of much faster price increases once in a while. If you have no inflation plan, you just get poorer every year. You would disregard inflation at your own peril unless your cushion is very large.

My understanding is that stock markets generally don't like inflation, either.

 

[brewer12345]

My understanding is that stock markets generally don't like inflation, either.

Sort of. The markets seem happiest with a "goldilocks" inflation picture. If you have too much, it introduces lots of destructive behaviors that make sense in inflationary environments but are ultimately poor chices for the long term economy ("buy useless gold" rather than invest in factories, etc.).

If you have too little, you end up like Japan for the last decade plus.

But right in the middle, everyone seems happy. Even better yet when inflation is moderate and doesn't fluctuate too much.

 

[SecondCor521]

Random thoughts on inflation, since I've been thinking about this a little lately:

1. It seems to me that inflation is ingrained in our lifestyles in several different ways: We expect to have nicer things as we grow older. Our salaries, on average, go up over our lifetimes. We buy the basics when we're younger and then have additional disposable income and figure, "Why not buy a nicer set of dishes?"

2. In my case, my largest several expenses have a 0% or even a negative inflation rate built into them: child support, child care, and interest expense. My child support and child care expenses are fixed figures that drop, step-wise, as my kids reach adulthood and/or outgrow the need for child care. My interest expense drops with each mortgage and student loan payment I make. A quick calculation shows me that about 60% of my expenses fall into this category.

3. Has anyone measured, long term, their own personal inflation rate?

2Cor521

 

[SecondCor521]

I realized how important inflation is when I set my inflation assumption in my spreadsheet to 0% (from the 3% that I normally use) and saw my retirement date move forward by 3 years. This represents about a 20% reduction in my remaining working years.

2Cor521

 

[Mary_From_Georgia]

Hmmm, checked the price of chicken feed lately? Would that plan include going without health insurance? Gasoline? Electricity?

But its a silly thing to debate when it is relatively easy to invest in stuff that keeps up with inflation.

Yes I have. Poor example. : ) Then I wouldn't eat chickens....I'd eat greens, peaches, tomatoes, and go fishing. : )

 

[retire@40]

I see your point, but think it does make a difference in what you buy....I'm a country gal that grew up in rural GA. I could easily go back to my hometown and live happily ever after---raise my own chickens and dart into the city when I needed a "rush" if it came to that...

Makes a difference not only in what you buy, but what you do.

If you move back to country living because things get expensive in the city, then inflation would have been a factor in your life.

 

[cute fuzzy bunny]

3. Has anyone measured, long term, their own personal inflation rate?

You betcha. This seemingly impossible to measure stat seems to be running in the 6-7% range around here.

Over the last 5 years my health insurance has tripled as has my cable internet bill. Gas, most food items, electricity and water have doubled.

Future costs that are coming down the rail like college tuition are going to challenge my abilities to earn an offsetting amount.

My real estate taxes were capped by prop13 until I moved, now they're doubled as well.

I cant really think of any regular expense thats gone down in price, stayed the same, or even experienced just a moderate increase in price.

My dad, living in the same area says that he's seen about a 30% decrease in his social security checks buying power over the past ten years. Coupled with the CPI adjustments, that puts him in the same 6-7% inflation rate.

I've offset most of this by changing lifestyle - no more eating out, no expensive clothes, buying cheaper foods and buying at warehouse clubs, etc. But theres a bottom limit to that contraction.

IMO, how inflation affects you is as or more important than your investment return rates, far more important than investing expenses, and one of the chief threats to long term early retirement survival.

The nature of it is insidious. There is no 'crash', no one year holy-crap-look-at-that effect. It wears slowly over a period of 10-30 years.

Looking at Joe Dominguez' life is a great example of how this influence effects a long term retiree, and where it can land you.

 

[Sam]

Thanks CFB. WOW! How do people cope?

Anyone from the Bay Area, Calif? Are you also seeing the same inflation rate?

 

[cute fuzzy bunny]

Well I think most people cope by working well into their 60's, then they eat their principal until they realize its going a little faster than they thought, then they cut back on their lifestyle to suit the shrinking income.

Thing is, they've only got an average of about 10-12 years before the clock runs out.

Its a pretty different clock cycle with early retirees. Hell, I may have 40 years or more of this crap to contend with. Its why I often pluck that inflation string. Its important.

I'm going to solve it (I hope) with a high equity portfolio with a cash buffer and ride out the volatility. Its the only investment class exceeding the pace of inflation.

It really helps to have a part time job somewhere in the family. My wifes part time job helps cut the health care costs somewhat and produces a wage adjusted income to keep some cash flow in the pipeline.

ESRBobs book is well worth reading in this regard.

 

[Sam]

What about young people? 20s, 30s? Do their wage, salary keep up? Are they getting 6-7% yearly raise?

 

[brewer12345]

What about young people? 20s, 30s? Do their wage, salary keep up? Are they getting 6-7% yearly raise?

No, we are all penniless and livng under overpasses because inflation made us poor. Since I am a little slow today, I will be having frog for dinner because they are easier to catch.

 

[Sam]

Bon appetit.

BTW, I was asking about young people in the Sacramento area, where inflation is believed to run 6-7%. So that excludes you, brewer. But go ahead, catch that frog just in case.

 

[cute fuzzy bunny]

According to the stats I've seen, wage earners have been losing ground the last 5-6 years. Generally in historic terms, wage increases have been a good bit higher than most inflation index adjustments. The latent squeeze probably has a number of causes, from "profit enhancement"/"productivity" improvements to outsourcing driving down wages, reduced demand for some categories of employee, etc.

Look at the social security web site to see how they calculate wage based increases prior to issuance of benefits, vs how they're adjusted after benefits commence. The wage increases are a fair bit higher.

 

[FIRE'd@51]

What about young people? 20s, 30s? Do their wage, salary keep up? Are they getting 6-7% yearly raise?

I think the way young people do it is through productivity growth. As they age, they do their job better, receive significant raises and promotions, etc.

If they are in the type of job that doesn't require productivity growth, my guess is they probably don't.

 

[cute fuzzy bunny]

No, we are all penniless and livng under overpasses because inflation made us poor. Since I am a little slow today, I will be having frog for dinner because they are easier to catch.

A very good example in this instance of how someone earning a competitive rising wage doesnt feel the effects of inflation as much as someone who is already retired for the long haul. Thanks Brewer.

 

[Sam]

CFB, do you still have a link to those stats?

 

[cute fuzzy bunny]

Some "end of the open hose" data sources for perusing:

Usual Weekly Earnings of Wage and Salary Workers
About.com: http://www.bls.gov

A nice summary article:
Report: Most workers not seeing wages outpace prices - Aug. 28, 2006

A BLS summary:
http://www.bls.gov/news.release/pdf/realer.pdf

Where you get some interesting stuff is when you winnow out the highest 20-25% wage earners. Their wage increases are thumping inflation. The lower 75-80% are seriously underperforming.