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CPI vs. anticipated inflation rate
Old 04-28-2011, 06:48 PM   #1
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CPI vs. anticipated inflation rate

This may be a very stupid question, and I've searched for an answer, which if there is way over my head. I seem to get a 100% discrepancy leaving all other inputs unchanged, if I use CPI (give twice as high a success rate) as a 3% inflation rate. I do understand that CPI does not include food and energy, but what I am trying to figure out is which (CPI or 3%) gives the most valid result. Thank you for your insight.

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Old 05-07-2011, 03:06 PM   #2
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First of all, headline CPI does include food and energy - core CPI does not; and Firecalc uses headline CPI. My guess is that over most 30-year periods, CPI has averaged less than 3%, so if you increased your withdrawal rate by 3% annually, you would have been increasing it in real (inflation-adjusted) terms.

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Old 05-07-2011, 03:10 PM   #3
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It's hard to say for sure, but I think most "ordinary" people buying primarily essential goods (as opposed to bigger ticket discretionary items) are feeling a considerably higher inflation rate than is reported by CPI, and have for quite some time.
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)
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Old 05-08-2011, 08:18 AM   #4
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I have been using 4% personal inflation rate since I retired in 2002. It creates a reasonable plan that gives me more confidence because there are some things in headline CPI that I don't agree with.
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Old 05-08-2011, 09:26 AM   #5
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Originally Posted by kcowan View Post
I have been using 4% personal inflation rate since I retired in 2002. It creates a reasonable plan that gives me more confidence because there are some things in headline CPI that I don't agree with.
I agree with this approach as I believe they changed the methodology for calculatiing CPI awhile back. I think the change incorporated better quality products and more feature laden products into the mix. Not sure I agree with the thinking on that although I will say it's certainly more complicated than I've described and maybe out of my league. Anyway, a little added safety margin isn't a bad thing.
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Old 05-08-2011, 09:38 AM   #6
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Just to confuse the issue, I use a real return of 1-2% in my planning, hopefully a conservative estimate. Getting inflation "right" and investment returns "wrong" or vice versa can lead to all sorts of "surprises." To me it's more important that you're comfortable with both.

I'd want to know what kind of investment returns the model (FIRECALC or other) assumes before I'd pick what to enter for inflation. For example, if the chosen model is using 10% returns, 3% inflation would be far too optimistic IMO for the decades ahead in the USA. I typically use 3-3.5% for inflation and 5% for returns, deliberately conservative. If both are higher, as I expect, my "plan" will still be somewhat intact. YMMV
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Old 05-08-2011, 09:52 AM   #7
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I use CPI for planning purposes as my personal inflation rate over the past 10 years has been below well CPI. For example, I have spend less on food and gas YTD than I did during the same period last year. I can't explain how that is even possible, given the kind of inflation we have seen in those 2 categories over the past year, but Quicken doesn't lie. Perhaps, all the headlines about food and gas inflation make me unconsciously a more careful consumer, I don't know.

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