Official ER Forum January Inflation Report
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cute fuzzy bunny
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Interesting that we spend a lot of time measuring and running simulations only to propose that none of it is measurable or predictable, so its a waste of time 
If you added
4) We should make sure our investment philosophy reflects realistic expectations of returns and inflation as we experience them
then we'd have a nice list.
Remember that my key point all along is that people should periodically look at their investments, lifestyle and the effects of inflation and make sure they're making enough money to offset their spending and the rising cost of living.
Should one discover that their spending is rising at a rate faster than their expected withdrawal rate, whether due to the effects of inflation, lifestyle changes or unpredictable events, their investments may need to be adjusted to suit.
I guess because I factor in amortized figures for every capital replacement or situation I can think of, then add a 30% pad to account for the "unknown", my budget never exceeds my expectations. Perhaps people playing it a little too close to the waterline might not be so lucky.
If you added
4) We should make sure our investment philosophy reflects realistic expectations of returns and inflation as we experience them
then we'd have a nice list.
Remember that my key point all along is that people should periodically look at their investments, lifestyle and the effects of inflation and make sure they're making enough money to offset their spending and the rising cost of living.
Should one discover that their spending is rising at a rate faster than their expected withdrawal rate, whether due to the effects of inflation, lifestyle changes or unpredictable events, their investments may need to be adjusted to suit.
I guess because I factor in amortized figures for every capital replacement or situation I can think of, then add a 30% pad to account for the "unknown", my budget never exceeds my expectations. Perhaps people playing it a little too close to the waterline might not be so lucky.
wabmester
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Cute Fuzzy Bunny said:Interesting that we spend a lot of time measuring and running simulations only to propose that none of it is measurable or predictable, so its a waste of time
If you added
4) We should make sure our investment philosophy reflects realistic expectations of returns and inflation as we experience them
Honestly, I do think it's laughable that we give so much weight to the idea that past is prologue -- that we can extrapolate trends via straight-line approximation. But it's human nature to look for patterns, I guess.
T-Al wants to answer the question "what sort of raise should retirees get this year?" I think it's clear that there is no general answer to that question.
You want to answer the question "what sort of offset should we add to the CPI to aid our investment planning?" I think it's clear that it's *very* hard to figure that out.
Cost of living is not just about prices. Maybe the closer you get to a barebones budget, the more it is.
So, once you hit barebones, can you find the CPI offset? What if, for example, health insurance premiums stay constant, but *your* premiums go up due to increasing age? That's not generally considered inflation, but we are destined to feel the effects.
I do think planning for a rising cost of living is prudent. Personally, I don't know how to predict or plan for a specific magnitude. So, I buy health care stocks to hedge againt rising health care costs. Oil stocks to hedge against energy inflation. And a mix of nominal and CPI-linked bonds since I don't know if the bond market is high or low in its inflation estimates.
What do you do?
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TromboneAl
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Yes, that's what I intended when I started the thread.
wabmester
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TromboneAl said:
Sarcasm?
How about a new thread with a methodology? E.g., everybody gives the delta between 2006 spending and 2005 spending (as a percentage). Then you could scatter plot and do a regression.
Then repeat that every year for the next 10 years, and maybe we'd have something we could compare to the CPI.
Then what would we do with that information?
cute fuzzy bunny
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Not particularly worthy of doing in a broad spectrum, imo.
I suppose if we spent a quarter of the time we're spending crapping on the idea actually trying to find out what goodness is in it, we might have a solution.
This aint that hard. My investments need to make as much as i'm spending. My spending goes up, I either need to make more (higher return, higher risk portfolio), reduce my spending (basket substitute or elimination of non essentials) or make the conscious decision to consume more principal than I had previously considered.
Why I'd want to use a number based on a working person who rents in the city and doesnt pay health care when most of us own a home, live outside the urban area and pay our own health care is the real mystery...
Seems like we're uncovering an interesting piece of data already...that many people see no inflationary effect on their spending, a significant drop in their spending after retiring, and in some fair number of cases a decrease over time in spending, coupled with a proposal that our spending in old to very old age may drop further and at a sharper rate.
So perhaps its plausible that inflation is nothing whatsoever to worry about and we're all taking on far too much risk in our investments to try to overcome something that has no influence on us.
Except for that whole Joe Dominguez thing.
I suppose if we spent a quarter of the time we're spending crapping on the idea actually trying to find out what goodness is in it, we might have a solution.
This aint that hard. My investments need to make as much as i'm spending. My spending goes up, I either need to make more (higher return, higher risk portfolio), reduce my spending (basket substitute or elimination of non essentials) or make the conscious decision to consume more principal than I had previously considered.
Why I'd want to use a number based on a working person who rents in the city and doesnt pay health care when most of us own a home, live outside the urban area and pay our own health care is the real mystery...
Seems like we're uncovering an interesting piece of data already...that many people see no inflationary effect on their spending, a significant drop in their spending after retiring, and in some fair number of cases a decrease over time in spending, coupled with a proposal that our spending in old to very old age may drop further and at a sharper rate.
So perhaps its plausible that inflation is nothing whatsoever to worry about and we're all taking on far too much risk in our investments to try to overcome something that has no influence on us.
Except for that whole Joe Dominguez thing.
wabmester
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Cute Fuzzy Bunny said:
I'm with you. Sort of. I love to measure stuff, but let's clarify what we're looking for.
I'd be interested to know absolute spending and percentage change vs prior year by age, family size (and kid(s) age(s)), location, and retired/working status. It'd also be cool to break out several factors: travel, food, health insurance, etc.
Ambitious, but doable. Anything less would be not-so-useful, I think.
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TromboneAl
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Just being silly.
CFB, you and I are in a similar position in terms of having kids. My oldest daughter and your Gabe are two months apart. How did you, in your particular situation, account for the change in spending due to change in familial circumstances when determining your year over year spending % change to get at a personalized CPI? For example, your 2004 expenses didn't include any child-related expenses. 2005 and 2006 did.
For me, I had zero children in 2004, 1 in 2005, and a cumulative total of 2 in 2006. My expenses are obviously going to increase, but how do I allocate the year over year expense delta between the increase in family size and the increase in the price of goods and services?
We also had many extraordinary healthcare expenses in 2006, approaching $8-9k (LASIK surgery, a couple of crowns, a couple of root canals, baby delivery, etc). This year we won't have any of that it seems. Same for one offs like remodeling jobs. I don't plan on remodeling both bathrooms, building a storage building, building a roof over the porch, renovating the fireplace and building a wall of bookshelves and cabinets like I did in 2005 and 2006.
My needs vary so much year to year that it seems virtually impossible to get an apples to apples comparison of year over year personal inflation. And when it comes to figuring it in the future, I'd rather budget my expected needs, and add a simple estimate of inflation (CPI for most stuff, maybe CPI+3 for healthcare and CPI+2 for kids' college costs).
Seriously, CFB, I'm curious how, if at all, you account for changes in spending patterns.
For me, I had zero children in 2004, 1 in 2005, and a cumulative total of 2 in 2006. My expenses are obviously going to increase, but how do I allocate the year over year expense delta between the increase in family size and the increase in the price of goods and services?
We also had many extraordinary healthcare expenses in 2006, approaching $8-9k (LASIK surgery, a couple of crowns, a couple of root canals, baby delivery, etc). This year we won't have any of that it seems. Same for one offs like remodeling jobs. I don't plan on remodeling both bathrooms, building a storage building, building a roof over the porch, renovating the fireplace and building a wall of bookshelves and cabinets like I did in 2005 and 2006.
My needs vary so much year to year that it seems virtually impossible to get an apples to apples comparison of year over year personal inflation. And when it comes to figuring it in the future, I'd rather budget my expected needs, and add a simple estimate of inflation (CPI for most stuff, maybe CPI+3 for healthcare and CPI+2 for kids' college costs).
Seriously, CFB, I'm curious how, if at all, you account for changes in spending patterns.
cute fuzzy bunny
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I think the problem at hand is that I know what the problem is and am looking for how to measure it - how much is my spending going up due to inflation (and other factors) and how much do I need to worry about that when choosing my investments. Eminently doable and useful, at least to me.
Looks like you want to create a bunch of data and then see what it tells you.
Justin - I guess I'm a weirdo. I know what everything I buy costs and I take note when the prices go up and down. My budget breaks out the non-discretionary costs from the larger discretionary ones you mentioned. One time costs are also separate. Magic baby appearance resulted in another budget category added to the non-discretionary and several presumed large expenses added to the discretionary budget, like preschool costs, private school costs, college, buying my wife another new car when we pass down the 16 year old lexus to gabe, etc.
In short, I can pull up my budget and see what chunk is non-discretionary and what parts of it are rising. Electric, food, tv, internet, etc. I also periodically update my large/capital/periodic purchase plans with newer, usually higher figures to match revised assumptions.
I sort of give up at this point, having been beaten into submission. I just cant for the life of me imagine how people will worry about whether a fund costs .20% or .50%, go on for page after page talking about the need for tips and ibonds to deflect inflation, worry about investment mixes that might return a quarter or half percent more over 20 year periods, and fret about whether 4% or 4.5% is the magic number. Yet when it comes to the actual influence of inflation, lets just slap in the oft disputed number from a govt report, the basis of which is a group that has very little correlation to an early retiree. Good enough.
I think the primary problem is that we have a mixed bag of people among the 10-15 most vocal posters. Some have portfolios large enough that inflation really isnt a threat. Others have a working spouse and inflation therefore is also less interesting. Some are very aggressive investors who have a high equities component and presume the returns from that will offset any inflationary pressure. Others are very conservative investors who place a lot of holdings into CPI adjusted instruments and feel confident that their return is 'real'.
I think one of my biggest issues is that i'm usually thinking in terms of the "true" early retiree who is living solely from a portfolio of investments (of which I was a member, but am no longer) and we have very few of those here.
Looks like you want to create a bunch of data and then see what it tells you.
Justin - I guess I'm a weirdo. I know what everything I buy costs and I take note when the prices go up and down. My budget breaks out the non-discretionary costs from the larger discretionary ones you mentioned. One time costs are also separate. Magic baby appearance resulted in another budget category added to the non-discretionary and several presumed large expenses added to the discretionary budget, like preschool costs, private school costs, college, buying my wife another new car when we pass down the 16 year old lexus to gabe, etc.
In short, I can pull up my budget and see what chunk is non-discretionary and what parts of it are rising. Electric, food, tv, internet, etc. I also periodically update my large/capital/periodic purchase plans with newer, usually higher figures to match revised assumptions.
I sort of give up at this point, having been beaten into submission. I just cant for the life of me imagine how people will worry about whether a fund costs .20% or .50%, go on for page after page talking about the need for tips and ibonds to deflect inflation, worry about investment mixes that might return a quarter or half percent more over 20 year periods, and fret about whether 4% or 4.5% is the magic number. Yet when it comes to the actual influence of inflation, lets just slap in the oft disputed number from a govt report, the basis of which is a group that has very little correlation to an early retiree. Good enough.
I think the primary problem is that we have a mixed bag of people among the 10-15 most vocal posters. Some have portfolios large enough that inflation really isnt a threat. Others have a working spouse and inflation therefore is also less interesting. Some are very aggressive investors who have a high equities component and presume the returns from that will offset any inflationary pressure. Others are very conservative investors who place a lot of holdings into CPI adjusted instruments and feel confident that their return is 'real'.
I think one of my biggest issues is that i'm usually thinking in terms of the "true" early retiree who is living solely from a portfolio of investments (of which I was a member, but am no longer) and we have very few of those here.
REWahoo
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Mr Bunnyperson,
As an amused casual reader of this thread, I must say I totally agree with one of your assertions:
Not that there's anything wrong with that of course...
As an amused casual reader of this thread, I must say I totally agree with one of your assertions:
Cute Fuzzy Bunny said:
Not that there's anything wrong with that of course...
C
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TH,
You can worry about expense ratio's and actually do something about it. Not much you can do against inflation except hedge along with the CPI (which you don't believe in anyway).
So why worry about things you can't control? I think you need a hobby like Golf - Ala Jarhead
You can worry about expense ratio's and actually do something about it. Not much you can do against inflation except hedge along with the CPI (which you don't believe in anyway).
So why worry about things you can't control?
I think you need a hobby like Golf - Ala Jarhead
wabmester
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Cute Fuzzy Bunny said:
I'd love to see your numbers, and those of any other OCD- Quicken-types who've collected such data -- in the proper demographic and geographic context.
I bet in your case, lifestyle changes (marriage, kid, etc) dominate your budget changes. Mine too. Not sure why anybody would want to factor that stuff out and look only at some single "inflation" number. Spending matters.
I use CPI-U as a macroeconomic indicator. GDP deflator is probably even better. I don't take them personally.
All I know is that whenever I go the grocery store these days I'm shocked at the cash register. Inflation is real over a number of years -- whether you are a percent above or below the national averages -- and you've got to take it into consideration in your financial planning. You can cut living expenses by lowering your standard of living of course, but that doesn't mean inflation isn't still there impacting you Not arguing with anyone's p.o.v. here -- no dog in this fight -- just saying inflation is real, not figmentary/personal/. Over decades it creeps up on you bigtime, even if you can dodge it for awhile or substitute away from it for awhile.
wabmester
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ESRBob said:
Agreed. So, what do you do about it? Increase your portfolio risk beyond your tolerance in the hope of higher returns a la Mr Bunny?
Wab,
Not sure if this answers your questions, but the plan I use just builds in an average 3% inflation and the SWR added to that, plus .5% fees is below the historical return on the portfolio. Then the historical worst case testing with withdrawals in good and bad times shows that the portfolio still holds up, in real terms, over the longest periods. So I just kinda ignore it at the finest level and say, inflation will be there, I'm protected historically, so let your annual withdrawals define your spending parameters -- belt-tighten when required -- and don't worry about what the actual inflation rate is. Now if inflation started running 5% a year (in the economy) for a number of years, I'd be worried, unless my portfolio was still averaging the same real returns as during the 3% inflation environment.
Sgeee-- maybe engineers and artists are a lot closer than I thought! I see how both fields need a certain percent inspiration and a much bigger percent of disciplined cranking through things. That explains a lot -- except for the pocket protectors
Not sure if this answers your questions, but the plan I use just builds in an average 3% inflation and the SWR added to that, plus .5% fees is below the historical return on the portfolio. Then the historical worst case testing with withdrawals in good and bad times shows that the portfolio still holds up, in real terms, over the longest periods. So I just kinda ignore it at the finest level and say, inflation will be there, I'm protected historically, so let your annual withdrawals define your spending parameters -- belt-tighten when required -- and don't worry about what the actual inflation rate is. Now if inflation started running 5% a year (in the economy) for a number of years, I'd be worried, unless my portfolio was still averaging the same real returns as during the 3% inflation environment.
Sgeee-- maybe engineers and artists are a lot closer than I thought! I see how both fields need a certain percent inspiration and a much bigger percent of disciplined cranking through things. That explains a lot -- except for the pocket protectors
cute fuzzy bunny
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Bob - You can indeed dodge it a while, but theres a bottom to that. I shop at about the cheapest market that i'm going to walk into, rather than the fancy one I liked when I moved here. I quit buying filet mignon and rib eye steaks when the prices went to $16-20/lb. I raised my insurance deductibles. I started doing as much repair/replacement as I could do myself to avoid paying ridiculous prices to repair people and contractors.
So while I've been able to reduce my spending considerably since my working days, i'm pretty much at the bottom of it without reducing quality of life.
I want to know what effect inflation has on my spending over the term of my retirement so I can plan my investments accordingly.
If the average true early retiree doesnt know what inflations effect is on their spending, they may take on too much risk trying to offset something that isnt actually effecting them, or become too conservative and not create enough wealth to offset the increased cost.
C-T...perhaps if you can explain why you felt the need to analyze your spending to see that your personal rate of inflation was similar to the CPI-U? Did you feel that the exercise was wasted time? Would you have done anything differently with your spending or investing if you found that your PRI was lower or higher than you thought? Do you believe that because it was similar for you that its therefore similar for everyone? Do you think nobody should make an effort to do what you did? If so, why?
Wab - No quicken here, just a spreadsheet I take 15 minutes updating once a year. And i've already explained at least a half dozen times what I want to know and why. I also dont know where you're getting the "increase your risk tolerance" comment. I'm comfortable with my risk tolerance and my portfolio risk is probably a lot lower than most people. Seems you're more interested in arguing at this point than in helping people learn something.
As far as the CPI being an effective or accurate measure, lets just go to the horses mouth.
From the BLS CPI web site, frequently asked questions:
5. Does the CPI measure my experience with price change?
Not necessarily. It is important to understand that BLS bases the market baskets and pricing procedures for the U and W populations on the experience of the relevant average household, not on any specific family or individual. It is unlikely that your experience will correspond precisely with either the national indexes or the indexes for specific cities or regions.
According to data from the BLS over the last ~20 years a proposed CPI for retirees has grown about 15.31% more quickly than the CPI-W, which itself is somewhat higher than the CPI-U.
In general and on average, you'd be losing about 1% a year to inflation by using the CPI-U as a measuring stick.
So while I've been able to reduce my spending considerably since my working days, i'm pretty much at the bottom of it without reducing quality of life.
I want to know what effect inflation has on my spending over the term of my retirement so I can plan my investments accordingly.
If the average true early retiree doesnt know what inflations effect is on their spending, they may take on too much risk trying to offset something that isnt actually effecting them, or become too conservative and not create enough wealth to offset the increased cost.
C-T...perhaps if you can explain why you felt the need to analyze your spending to see that your personal rate of inflation was similar to the CPI-U? Did you feel that the exercise was wasted time? Would you have done anything differently with your spending or investing if you found that your PRI was lower or higher than you thought? Do you believe that because it was similar for you that its therefore similar for everyone? Do you think nobody should make an effort to do what you did? If so, why?
Wab - No quicken here, just a spreadsheet I take 15 minutes updating once a year. And i've already explained at least a half dozen times what I want to know and why. I also dont know where you're getting the "increase your risk tolerance" comment. I'm comfortable with my risk tolerance and my portfolio risk is probably a lot lower than most people. Seems you're more interested in arguing at this point than in helping people learn something.
As far as the CPI being an effective or accurate measure, lets just go to the horses mouth.
From the BLS CPI web site, frequently asked questions:
5. Does the CPI measure my experience with price change?
Not necessarily. It is important to understand that BLS bases the market baskets and pricing procedures for the U and W populations on the experience of the relevant average household, not on any specific family or individual. It is unlikely that your experience will correspond precisely with either the national indexes or the indexes for specific cities or regions.
According to data from the BLS over the last ~20 years a proposed CPI for retirees has grown about 15.31% more quickly than the CPI-W, which itself is somewhat higher than the CPI-U.
In general and on average, you'd be losing about 1% a year to inflation by using the CPI-U as a measuring stick.
wabmester
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Bunny, this is where I got your higher risk bit from:
I think it's one approach. Reducing your withdrawal rate is another approach. Trying to hedge with inflation-tracking investments is another approach. We all agree that complaining about inflation or worrying about inflation is fun, but not a good approach.
My approach is to hedge, watch, and adapt. So far, I'm in the clear. I'll keep you updated.
Cute Fuzzy Bunny said:
I think it's one approach. Reducing your withdrawal rate is another approach. Trying to hedge with inflation-tracking investments is another approach. We all agree that complaining about inflation or worrying about inflation is fun, but not a good approach.
My approach is to hedge, watch, and adapt. So far, I'm in the clear. I'll keep you updated.
cute fuzzy bunny
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Hmm...so since you've decided to forgo knowledge of what your actual rate of inflation is having on your spending, how would you know how much to reduce your withdrawal rate? Or that you even needed to do so?
Are you in the clear because inflation during the entire term of your retirement has been fairly benign?
How effective are the inflation tracking investments as a hedge when most of them pay 1-2% over CPI-U, if the CPI for a retiree is 1% higher than the CPI-U...prospectively neutralizing the gain or at a minimum cutting it in half?
The vacillation between "not close enough" and "closer than I need" on varying topics of finance is something i'm still finding very, very interesting. Jumping money from one institution to another one for an extra .25%. Buying a bond because its paying .35% more this year than last year. But a possible full percentage off on a your real returns? Good enough. This is cracking me up.
This reminds me of a story about my aunt Mary. Mary was an awful driver. When she got to an intersection, she'd look rigidly ahead and keep going. Her theory was that if she didnt look left and right, other drivers would see her and note that she was a crazy old lady that wasnt looking, so they should stop and let her go.
Mary lived a full and enjoyable life and to the best of my knowledge gained greatly from her lack of concern about other oncoming vehicles and the stress relief of knowing that others were watching out for her.
Until the MBTA bus broadsided her at 25MPH and what was left of her car skidded into a pole. She wasnt much of a believer in seat belts either, not that it would have mattered.
(No sympathy needed...it was a long time ago and Mary wasnt that nice of a person)
So may I presume that if one feels that an activity is unworthy of performing for their own personal needs, that they can shut the **** up when people who do think its a worthwhile effort are discussing it?
Are you in the clear because inflation during the entire term of your retirement has been fairly benign?
How effective are the inflation tracking investments as a hedge when most of them pay 1-2% over CPI-U, if the CPI for a retiree is 1% higher than the CPI-U...prospectively neutralizing the gain or at a minimum cutting it in half?
The vacillation between "not close enough" and "closer than I need" on varying topics of finance is something i'm still finding very, very interesting. Jumping money from one institution to another one for an extra .25%. Buying a bond because its paying .35% more this year than last year. But a possible full percentage off on a your real returns? Good enough. This is cracking me up.
This reminds me of a story about my aunt Mary. Mary was an awful driver. When she got to an intersection, she'd look rigidly ahead and keep going. Her theory was that if she didnt look left and right, other drivers would see her and note that she was a crazy old lady that wasnt looking, so they should stop and let her go.
Mary lived a full and enjoyable life and to the best of my knowledge gained greatly from her lack of concern about other oncoming vehicles and the stress relief of knowing that others were watching out for her.
Until the MBTA bus broadsided her at 25MPH and what was left of her car skidded into a pole. She wasnt much of a believer in seat belts either, not that it would have mattered.
(No sympathy needed...it was a long time ago and Mary wasnt that nice of a person)
So may I presume that if one feels that an activity is unworthy of performing for their own personal needs, that they can shut the **** up when people who do think its a worthwhile effort are discussing it?
wabmester
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Cute Fuzzy Bunny said:
My WR is well under 4%, so that tells me I have a safety cushion vs the worst-case historical scenario. That helps me sleep at night, and I recommend such a cushion to all. Prepare for worse-than-the-worst, and hope for something better.
I don't consider TIPS a hedge against personal inflation. As I've stated a zillion times before in our variations of this chat, I consider them an alternative to nominal bonds, which have an embedded implicit inflation risk/estimate.
I've already described other investments that are inflation protected. To those, add real estate, commodities, etc. I recommend them as part of a bullet-proof portfolio.
C
Cut-Throat
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Cute Fuzzy Bunny said:
Sure. No problem.
I actually believed that the CPI was understated by my anecdotel evidence. I decided that I needed some actual facts. After the exercise, I changed my mind and I now believe that the CPI is pretty damn close. I have hedged my investments accordingly. So it was not wasted time for myself at all! -
I think everyone should keep track of their spending and base their decisions on actual facts, rather than a knee-jerk reaction everytime they go to the grocery store.
Having an open mind is a trait of a good Democrat. - I try to base my decisions on facts instead of fantasy.
You mean artists engage in unprotected pocket insertions of their writing utensils? How uncivilized.ESRBob said:. . . Sgeee-- maybe engineers and artists are a lot closer than I thought! I see how both fields need a certain percent inspiration and a much bigger percent of disciplined cranking through things. That explains a lot -- except for the pocket protectors
wabmester
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Sniff. Sniff.
I felt bad about beating a cute fuzzy bunny about the ears, so here's some data that actually backs his assertion.
BLS consumer expenditures report
This shows that consumer spending went up over 6%/year from 2003-2005.
CPI-U went up an average of 3.1% during those years.
This is not a statement about inflation, but it does say something about keeping up with the Joneses (you know, the ones with a negative savings rate).
So, I guess this means that only a 1% SWR is truly safe, and nobody should retire until they have 100X their expenses. Or something.
I felt bad about beating a cute fuzzy bunny about the ears, so here's some data that actually backs his assertion.
BLS consumer expenditures report
This shows that consumer spending went up over 6%/year from 2003-2005.
CPI-U went up an average of 3.1% during those years.
This is not a statement about inflation, but it does say something about keeping up with the Joneses (you know, the ones with a negative savings rate).
So, I guess this means that only a 1% SWR is truly safe, and nobody should retire until they have 100X their expenses. Or something.
REWahoo
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wab said:
I vote for the "or something".
I've studied a lot of the BLS reports about CPI-U calculations. The USBLS web site has enough information to keep an army of us busy reading for a long time. The CPI-U calculation is pretty imperfect. The average basket of goods may reflect the average person and come nowhere near reflecting any given individual's spending habits. Some regions of the country experience significantly more inflation than others. What is purchased by even the average household tends to change as technology changes. . . There is even a question of what exactly CPI should track -- the increased cost of specific goods or the increased cost of maintaining a relative lifestyle?
As I read the reports two things became apparent to me: 1) Calculating inflation in a meaningful way is a very difficult problem. Figuring out what to place in the basket, when to change the items in the basket and how to weight the various categories turns out to be harder than it first appers. 2) The people doing this at USBLS are doing about as good a job as I can imagine. They spend a lot of time thinking about the CPI calculation issues, collect a lot of data, perform a lot of analysis, and publish their methods and results for everyone to see. I've been impressed with the detailed analysis I've read.
I can't do anything about inflation. But at least my retirement planning approximates the impact inflation is going to have on me by using a number that reflects a lot of honest hours of investigation and anlysis. That approximation is far from perfect, but the error it introduces at this point in my retirement would appear to be less important than other aspects of my planning and spending. I don't know if my annual spending will continue to decline over time, but if it does, I won't be the only person who experiences this spending pattern.
http://www.fpanet.org/journal/articles/2005_Issues/jfp0605-art7.cfm?&
It's not that I don't care about inflation . . . I've actually devoted a fairly significant amount of time investigating it. But I think I understand it enough to know I'm not going to do a better job than USBLS without a monstrous amount of effort, if I did a better job I wouldn't know how to use it, and that it's not hurting my plans now.
As I read the reports two things became apparent to me: 1) Calculating inflation in a meaningful way is a very difficult problem. Figuring out what to place in the basket, when to change the items in the basket and how to weight the various categories turns out to be harder than it first appers. 2) The people doing this at USBLS are doing about as good a job as I can imagine. They spend a lot of time thinking about the CPI calculation issues, collect a lot of data, perform a lot of analysis, and publish their methods and results for everyone to see. I've been impressed with the detailed analysis I've read.
I can't do anything about inflation. But at least my retirement planning approximates the impact inflation is going to have on me by using a number that reflects a lot of honest hours of investigation and anlysis. That approximation is far from perfect, but the error it introduces at this point in my retirement would appear to be less important than other aspects of my planning and spending. I don't know if my annual spending will continue to decline over time, but if it does, I won't be the only person who experiences this spending pattern.
http://www.fpanet.org/journal/articles/2005_Issues/jfp0605-art7.cfm?&
It's not that I don't care about inflation . . . I've actually devoted a fairly significant amount of time investigating it. But I think I understand it enough to know I'm not going to do a better job than USBLS without a monstrous amount of effort, if I did a better job I wouldn't know how to use it, and that it's not hurting my plans now.
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