Inflation: Does it really matter?

[pj86]

Does inflation matter?

Inflation matters as it is yet another reason to put your money in the areas where inflation hits you the least. Note to self: I must hate the money markets.

 

[cute fuzzy bunny]

Indeed. I find it ironic that the investments usually marked as "safe" are the ones most exposed to inflationary pressure, while those marked as "risky" are the least exposed to it.

In my mind, the riskiest approach is to buy investments that claim to be "proof" against inflation...without at least making sure they'll do that for your spending situation.

Because once you're there, you only have one option for "fixing" the problem.

 

[FIREd]

In the past 3 years I have tried to keep a tight control on our personal rate of inflation and I have managed to keep our expenses right at 60K a year since 2004. I have done so by cutting down on some expenses (phone bill, insurance, investment fees and commissions, etc...) and by shopping smarter (book flights longer in advance, plan for meals before hitting the grocery store instead of succumbing to impulse buys...). But also one of our biggest budget item (mortgage interests) has declined over the last 3 years, as have our health insurance premiums (yes that's right). Overall this tight inflation control did not force us to buy less or do less, it just forced us to look at each expense individually and try to identify cheaper alternatives. We still have a phone and we still use it as much as we did 3 years ago, but we pay less per minute. Same with insurance, same coverage as before but cheaper. As for investment expenses, we fired our FA and transferred our money to Vanguard. We still fly and go on vacation, but instead of booking 2 months before departure we book the trip 5-6 months earlier. You get the drift, it's not a question of tightening our belt by cutting things out of our budget, it's just smarter spending.
As somebody mentioned above, it would be difficult to keep this whole experiment going indefinitely. At some point, our expenses will have to start rising, but the past 3 years of inflation control will have a lasting effect: Overall I estimate that this excercise has reduced the size of the nest egg needed for us to retire by several hundred thousands dollars. I would like to keep that experiment going for another 2 years if possible.

 

[maddythebeagle]

Oh, boy another inflation thread...I think this is probably one of the more important issues on wealth creation/destruction... I think 6-7% personal inflation rate is what I have used for an estimate....of course, this doesnt include the "mcdonalds, grisley chicken nugget factor" (declining customer service and quality)...

Comparing food prices does get a bit difficult and maybe milk prices (something that isnt reduced in size or can easily be filled with sawdust) is a better for tracking...

My home heating costs are 15-18% increases...but that is the whole energy thing and living in a colder climate...trying to figure what averages the number down to 6-7% let alone 4%...

 

[kcowan]

I have done so by cutting down on some expenses (phone bill, insurance, investment fees and commissions, etc...) and by shopping smarter (book flights longer in advance, plan for meals before hitting the grocery store instead of succumbing to impulse buys...). ..

We have done the same things since 2002 when we ER'd. However, 2007 is the first year that no structural shifts are helping keep costs flat. We are finding personal inflation to be running in the 6-7% range YTD.

Air fares, gas, utilities, food, liquor all up considerably. Fewer deals at Costco, and the supermarkets. Yellowtail shiraz was 6.99 now 8.99, Popov vodka was 10 now 10.50, etc. (OK I do remember the liquor prices!)

 

[dumpster56]

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.

20 years ago I bought a brand new VW jetta for 10K I could buy a brand new toyota scion Xa today about the same size and better safety features for 13K. Bought a townhouse in NJ for 190K in 1987 today you could buy a house for 190K today in many parts of the country, Brand New.

I can still buy a 6pack of beer for under 2.50 . Same as 20 years ago. looking at an old electric bill. Cost per KWH was 11.6 cents in 1987 I am payin 9.045 cents a KWH today.. LESS!

 

[cute fuzzy bunny]

All of this points out that if you live in a crappy part of the country, drink crappy beer, and drive a crappy car you can avoid inflation.

But if you live in california (my house sold for $225k 7 years ago, $575k today) , drink good beer (Sierra Nevada could be had for $4 a six pack 5 years ago, regularly $7 now), and drive a nice car (my expedition sold for $22k in 2000, same car goes for about 34k now)...maybe a different result.

Which is why you oughta know what your inflation rate is.

Between people who, like me, are seeing up to 7% and people who feel their rate is at or near zero, is anyone getting the message why I keep poking that CPI thing and 'inflation protected' securities with a stick?

 

[Sam]

20 years ago I bought a brand new VW jetta for 10K I could buy a brand new toyota scion Xa today about the same size and better safety features for 13K. Bought a townhouse in NJ for 190K in 1987 today you could buy a house for 190K today in many parts of the country, Brand New.

I can still buy a 6pack of beer for under 2.50 . Same as 20 years ago. looking at an old electric bill. Cost per KWH was 11.6 cents in 1987 I am payin 9.045 cents a KWH today.. LESS!

Agree on car. I bought my first new car, a Corolla in 1986 for 9K. Today the least expensive Corolla is 13K, but is head and shoulder above the other in every category. Inflation: 1.8%

Disagree on house, beer. Don't know about electricity.

, and drive a crappy car you can avoid inflation.

....
, and drive a nice car (my expedition sold for $22k in 2000, same car goes for about 34k now)...maybe a different result.

I beg to differ. I would not call a Toyota Scion a crappy car. The Expedition, maybe.

 

[cute fuzzy bunny]

For certain its a decent vehicle. However, pricewise I doubt you could name more higher end cars than cars that are lower end.

Comparing a Jetta from 20 years ago, an expensive german higher end vehicle, with an entry level Toyota of today...seems a bit unreasonable.

Entry level priced vehicles from 20 years ago cost $3-5,000. Not 10k.

Comparing anecdotal data on large purchases made once every 5-10 years like televisions and cars also does not make a particularly valid assessment.

Whether the current product has a higher quality level or not is also up for serious debate. While you might be getting a better value, you still have to pony up the dollars. Explaining to your portfolio that it doesnt need to go down quite so much because you got a better quality item doesnt seem to work.

 

[Rich_by_the_Bay]

20 years ago I bought a brand new VW jetta for 10K I could buy a brand new toyota scion Xa today about the same size and better safety features for 13K. Bought a townhouse in NJ for 190K in 1987 today you could buy a house for 190K today in many parts of the country, Brand New.

I can still buy a 6pack of beer for under 2.50 . Same as 20 years ago. looking at an old electric bill. Cost per KWH was 11.6 cents in 1987 I am payin 9.045 cents a KWH today.. LESS!

And your point is what? That there's no inflation?

 

[Sam]

Entry level priced vehicles from 20 years ago cost $3-5,000. Not 10k.

As I reported above, my brand new 1986 Corolla cost 9K in October 1986. It was an entry level car.

 

[lazygood4nothinbum]

i retired (well, in my mind i just quit) before knowing much of finance, investments or this forum and hadn't at all taken inflation into account in figuring out what i'd need. fortunately, i was just as stupid about inflation as i was about investing and so i didn't know about markets or dividends or swr's either. so since i figured conservatively and since i'm not a spender, it all worked out ok. what i thought i'd have to spend without figuring inflation is just about what i will have to spend including inflation.

 

[cute fuzzy bunny]

I guess we can debate the level of vehicles endlessly, but my recollection was that cars like the Yugo and Hyundai Excel were considered entry level, at $4k and 5k respectively. I also believe the Tercel was toyotas entry level vehicle in 1986, at a price, well equipped, of around $5500-6000.

Stepping away from mass produced vehicles, Maddy's point of diminishing product quality/quantity conjoined with price increases is also well taken. A pound of coffee is now 12 ounces. The fish and chips place up the street from me doesnt offer free refills anymore...and the size of the piece of fish you get seems to have gotten smaller and thinner. The barbecue joint charges extra for a cup of sauce you used to get for free. Major appliances used to be counted on to last 15-20 years...I'm betting that ones made more recently arent quite so good. You used to be able to call a company up, talk to a human being, and have someone actually give a hoot that you were unhappy about a product, and they'd try to fix it for you. Now you go through voice menu hell to wait on hold for 20 minutes until you get to speak to "bob" from india, who reads from a script that has nothing to do with your problem and really could care less if it works out or not.

But I guess if you believe prices havent changed in 20 years, and that one can live as well now on what was considered good money then...what was a very good salary 20 years ago? 25K? 30K?

 

[dumpster56]

All of this points out that if you live in a crappy part of the country, drink crappy beer, and drive a crappy car you can avoid inflation.

But if you live in california (my house sold for $225k 7 years ago, $575k today) , drink good beer (Sierra Nevada could be had for $4 a six pack 5 years ago, regularly $7 now), and drive a nice car (my expedition sold for $22k in 2000, same car goes for about 34k now)...maybe a different result.

Which is why you oughta know what your inflation rate is.

Between people who, like me, are seeing up to 7% and people who feel their rate is at or near zero, is anyone getting the message why I keep poking that CPI thing and 'inflation protected' securities with a stick?

Crappy beer? Hey now Pabst blue ribbon was made in Newark NJ and I still drink it although its made someplace else by some other brewer but tastes the same. 2.29 a six pack here in NC today long neck bottles.

 

[cute fuzzy bunny]

I'd call it 'rat urine', but thats an insult to any self respecting rat.

 

[Nords]

I'd call it 'rat urine', but thats an insult to any self respecting rat.

I think the term you're fumbling for is "hedonic adjustment".

See, you're spending less money for a lot less quality but you're enjoying it so much more that the pleasure per unit price has actually gone up! I'm surprised [-]the government statisticians[/-] more sales staffs don't point that out... when the inevitable research report is released, it should be titled "The Schlitz Paradox".

I should also point out that I was able to respond to CFB's post without having any clue what was said by Newguy (on my "Ignore Poster" list). This is working great!

 

[cute fuzzy bunny]

Isnt it? This morning I got to watch what I'm pretty sure was a fight between two guys on my ignore list. It was totally up to my imagination!

 

[chinaco]

Stepping away from mass produced vehicles, Maddy's point of diminishing product quality/quantity conjoined with price increases is also well taken. A pound of coffee is now 12 ounces.

Yeah.. they do that. It is a very common set of ploys. The marketing people workout the marketing plan. The financial people want to increase profits on the product line so they shrink the product size (or quality) eventually they will not be able to justify further price increases on the same size. If they shrink it further, it is non-existent. So they start the cycle all over again. Supersize Coffee 16 oz. 25% more for only a 15% price increase. Of course, their cost on containers were probably reduced since there is a little less material used. Plus they Cheapened the grade of coffee by blending it with lower grade (cheaper) coffee and call it "new and improved" with some marketing pitch like "it stays fresh longer".

Next Step Shrink the size and remove the cheap coffee from the blend and call it "Pure Gourmet" Coffee... The cycle repeats.

 

[Bigritchie]

When I first I sold a food item for around $6 to make a nice bit, now I have to sell that same item for around $9 dollars to make around the same. And that is just within 8 years.

Not to mention Tomato prices are just always nuts due to hurricanes/floods bad weather.

In fact every item that I purchase to sell, has went up.

And of course I like everyone else in the world, use the high gas prices to raise prices even more, creating artificial inflation hehe.

 

[cute fuzzy bunny]

Oh its even easier than that. On looking through the coffee aisles and mail order outfits, I see that 8oz "pounds" are now well established.

Thats why I buy it mail order from Dunkin Donuts. An actual 16oz pound for $6.50 plus $8 to ship as many "real" pounds as I want. Good coffee too.


I see some beer now comes in 11oz bottles. Pretty soon you'll ante up ten bucks and some guy will squeeze a wet towel of beer into your open mouth.

 

[VoyT]

Maddy's point of diminishing product quality/quantity conjoined with price increases is also well taken. A pound of coffee is now 12 ounces. The fish and chips place up the street from me doesnt offer free refills anymore...and the size of the piece of fish you get seems to have gotten smaller and thinner. The barbecue joint charges extra for a cup of sauce you used to get for free.

Our latest discovery ... the southwestern-themed chain restaurant that used to serve rice and beans with the fajitas now charges $1 (it's a premium side, you see)
And the 1lb frozen fish that dropped to 12 oz is down to 11 oz now. Then again, it's from China, so I didn't buy it

 

[VoyT]

20 years ago I bought a brand new VW jetta for 10K I could buy a brand new toyota scion Xa today about the same size and better safety features for 13K. Bought a townhouse in NJ for 190K in 1987 today you could buy a house for 190K today in many parts of the country, Brand New.

I can still buy a 6pack of beer for under 2.50 . Same as 20 years ago. looking at an old electric bill. Cost per KWH was 11.6 cents in 1987 I am payin 9.045 cents a KWH today.. LESS!

Didn't you move from Jersey? Think that might account for your housing and electric costs?

Meanwhile, go ask your wife how grocery prices are doing week-to-week.
From the Christian Science Monitor:

The reason people are smarting: Inflation in grocery aisles is up by more in the first six months of 2007 than in all of 2006. That means food costs are on track for the biggest annual percentage hike since 1980, according to the Labor Department. The anticipated 7.5 percent increase would readily outflank the 2.6 percent core inflation rate to date, which excludes food and energy. It's across every grocery aisle, too, from burgers to bagels, from duck to dumpling.

 

[cute fuzzy bunny]

I suppose maybe the reason why my inflation rates run high and i'm sensitive to them is that my biggest expenses after taxes are insurance, food and gasoline. Aint that a happy trifecta...

Regarding rising grocery prices, I think I may have detected a cause. Bear with me. The town I used to live in had only an Albertsons and a Raleys about 5 years ago. Then Albertsons sold to Ralphs, but in turn Albertsons bought out Lucky. Albersons moved from their location to the Lucky location, and refurbed the store. Ralphs moved into the Albertsons and refurbed that store. Raleys refurbed their store so as to not look bad compared to the new Ralphs. Safeway and Bel-Air (part of raleys) annouced they'd open new stores in the area. Ralphs built a second market near the Raleys to compete. Neither the safeway nor the bel-air was built for more than 3 years. Ralphs went bust and closed both of their stores. Albertsons choked and sold out to Save-Mart, who remodelled the albertsons that was recently remodelled from a lucky. Now Nugget Market is remodelling the recently built Ralphs. Walmart and Target also just knocked down their walls and are adding the supermarket section to their stores. The original albertsons/ralphs is sitting vacant several years now. Rumor has it that a store that doesnt charge >$20/lb for meat is planning on going in there.

So I think the secret is clear. To get appropriate inflation protection, buy stock in companies that remodel supermarkets.

And if you sit on the board of a supermarket, or are a significant stockholder, tell them to quit remodelling the frickin stores, quit buying each other and moving from one part of town to another, and cut their prices a little bit.

 

[dumpster56]

I have seen the grocery prices, again purchase only things on sale. Still getting chicken breasts at 1.89 a pound boneless some weeks. Eggs still around a dollar a dozen, sure cans of tuna are smaller so what still can find albacore for 88 cents a can. Don't drink coffee so couldn't care about that price. water from the tap free. Grow our own veggies, greens etc. Potatos tomatos peppers can a bunch of stuff for the winter. Joined a farmers coop so lots of fruit is paid for from the beginning of the season.

Sure there is some inflation but you can get around big prices. Heck we got 20 pounds of fresh carolina shrimp at 4 dollars a pound yesterday. Froze a bunch!

 

[VoyT]

I have seen the grocery prices, again purchase only things on sale. Still getting chicken breasts at 1.89 a pound boneless some weeks. Eggs still around a dollar a dozen, sure cans of tuna are smaller so what still can find albacore for 88 cents a can. Don't drink coffee so couldn't care about that price. water from the tap free. Grow our own veggies, greens etc. Potatos tomatos peppers can a bunch of stuff for the winter. Joined a farmers coop so lots of fruit is paid for from the beginning of the season.

Sure there is some inflation but you can get around big prices. Heck we got 20 pounds of fresh carolina shrimp at 4 dollars a pound yesterday. Froze a bunch!

$4 a pound for shrimp is good, congrats. I buy sale stuff too, but I see inflation creeping up there. The 49 cent a pound chicken quarters are now 79 cents a pound on sale; the 77-cent eggs on sale are now 99 cents, the 99-cent per pound sale on round steak is now $2.19 a pound .. and so it goes.
Yeah, you can get around things, but right now, we have to dodge and weave even harder .. unfortunately we're still getting nicked.