Inflation over long periods of time

[marko]

Well said!

I too did the Masters degree while w*rking at Megacorp. DW was ready to divorce me by the time I was done! I dropped a hint (just a hint) about a doctorate and she put her foot down (both feet, actually)!

Of course now, at 79 I've sort of "aged out" of the earnings potential and depend on my SS, pension and my stash. Not a huge potential for any additional growth beyond current "good" financial results. Still I hope I'm "informing" more than I'm complaining.

We (DW and I) have always had a back up plan if we can't handle current expenses. We can 1) ditch the 2nd home and visit friends/family for a week or two instead of the whole summer. 2) Move back to the mainland and live like kings (and queens). So far, neither is required and we are just fine. Still, one notices things like "personal inflation" from time to time. Part of the ER game that we all have to play

I believe everyone should do an occasional SHTF analysis, separating the critical items from the nice-to-haves.

For us, our luxury car leases represent 18% of our annual spending...an easy thing to adjust through other options if we ever had to. We could also drop our boat club dues, and (heaven forbid!) our landscaper who runs us about $10k each summer.

Just nice to have something in your back pocket in the unlikely event should things get dicey.

As I noted earlier, the arrival of SS and Medicare took a huge load off of the portfolio.

 

[FD1000]

For us, the whole point of retirement is to stop working for good and never have to worry about money, including inflation. That's why we manage our portfolio to consistently generate more than we need. In fact, since 2018, I've doubled our portfolio in just six years while investing about 95% in bond OEFs.
We haven't changed anything so far. We actually raised our spending.

 

[Chuckanut]

*looks at forum title*

If people are w*rking to stay ahead in retirement, is it really retirement? Is it really retirement if you're eating cat food to save money to afford healthcare?

That’s a bit of a straw man comparison, since few if any people are eating cat food so they can afford healthcare. And I don’t know anybody who is suggesting that.

However, my two servings of fish a week nowadays are often some type of canned fish vs. the salmon steaks of the past. But, cat food in my diet? Only if I had fed canned salmon to my now deceased cat.

 

[Montecfo]

Those inflation calculators don't mean a whole lot when I'm seeing prices climb higher than the CPI figures, both short and long term. For example, homeowner's insurance climbed like 25% over 2 years with the deductible 250% of what it was, and much worse roof coverage. And premium nearly 400% of what it was in 2001 with a 5X deductible today! So, that's a problem with the 4% rule since it uses CPI for its basis.

Well yeah, but those inflation numbers do not purport to reflect price increases in Genxguy-ville. A conversion is needed.

But here is the formula:

(Annual inflation rate)x(annual in inflation rate) = Inflation rate in Genxguy-ville



Also, the 2% is the target for PCE, not CPI.

But I think Mr. Warsh may re-engineer things.

 

[surprising]

Inflation is an insidious detriment to all of us. We have tools and weapons at our disposal to fight our own inflation, but at some point and at some level of inflation we can be overcome.

Insidious is the right word. And I think it's worse the earlier one retires. I am at the beginning of a 4 decade retirement potentially, so prices will at least quadruple from now to then. And then there are shocks to the system like Covid that dramatically increased prices which will never be recovered because we will never have deflation. During Covid we had massive inflation spikes for 2 years, and now we're 'content' because we're back to 3-4%? That's 3-4% compounded *on top* of huge Covid inflation. Once on SS you do get some protection but for many of us SS will only cover a small percentage of overall expenses. So we are forced to be more risky and overweight equities in order to stay on top of inflation. In the last few years it has been great, but who knows what the future looks like. What happens if we have another lost decade in stocks like 2000-2009?

 

[Montecfo]

Inflation in the US.has been remarkably stable to lower over long periods. Consider the following annual CPI figures:

Since 2010: 2.76%
Since 2000: 2.57%
Since 1990: 2.65%
Since 1980: 3.10%
Since 1970: 3.93%
Since 1960: 3.82%

Source: Gemini citing BLS figures.

Posted elsewhere but seems very relevant to this discussion.

 

[Dtail]

I believe everyone should do an occasional SHTF analysis, separating the critical items from the nice-to-haves.

For us, our luxury car leases represent 18% of our annual spending...an easy thing to adjust through other options if we ever had to. We could also drop our boat club dues, and (heaven forbid!) our landscaper who runs us about $10k each summer.

Just nice to have something in your back pocket in the unlikely event should things get dicey.

As I noted earlier, the arrival of SS and Medicare took a huge load off of the portfolio.

We effectively do this in a lesser way every year with separating the budget into true discretionary vs non discretionary spending.

 

[Earl E Retyre]

I believe everyone should do an occasional SHTF analysis, separating the critical items from the nice-to-haves.

For us, our luxury car leases represent 18% of our annual spending...an easy thing to adjust through other options if we ever had to. We could also drop our boat club dues, and (heaven forbid!) our landscaper who runs us about $10k each summer.

Just nice to have something in your back pocket in the unlikely event should things get dicey.

As I noted earlier, the arrival of SS and Medicare took a huge load off of the portfolio.

We effectively do this in a lesser way every year with separating the budget into true discretionary vs non discretionary spending.

27% of our expenses budget is travel which is discretionary. I am also guessing that as we get older, travel will no longer appeal to us - specifically long flights and indirect flights. So that line item will likely decrease over time.

 

[Out of Steam]

I've put tires on both of our family cars in the past month. The total cost was just over $1700, though that included a set of low profile (19 inch) tires that aren't comparable to those sold years ago. I remember being shocked when tires hit $100 each.

A saving factor in our expenses is that we don't buy much in the way of durable items, and have time to shop secondhand.

 

[GenXguy]

Well yeah, but those inflation numbers do not purport to reflect price increases in Genxguy-ville. A conversion is needed.

But here is the formula:

(Annual inflation rate)x(annual in inflation rate) = Inflation rate in Genxguy-ville

4% x 4% = 0.16%. I wish.

Also, the 2% is the target for PCE, not CPI.

I know all about that, and I specifically mentioned it yesterday here: Current Inflation Index Reports and Fed Policy/Actions as well as other times on this forum. I do agree that the target should be a lower percentage. After such a run up, we need lower inflation to help balance things out and help those on low fixed incomes.

 

[GenXguy]

Posted elsewhere but seems very relevant to this discussion.

I responded in the other thread. Hopefully we can somehow get those numbers down closer to the Fed's 2% target (which is based on PCE, not CPI).

 

[Turbo29]

4% x 4% = 0.16%. I wish.

I know all about that, and I specifically mentioned it yesterday here: Current Inflation Index Reports and Fed Policy/Actions as well as other times on this forum. I do agree that the target should be a lower percentage. After such a run up, we need lower inflation to help balance things out and help those on low fixed incomes.

Shouldn't it be, 1.04*1.04=1.0816, 8.16%

 

[Montecfo]

4% x 4% = 0.16%. I wish.

Math is not your thing I guess? Maybe your inflation is not actually that bad after all

I know all about that, and I specifically mentioned it yesterday here: Current Inflation Index Reports and Fed Policy/Actions as well as other times on this forum. I do agree that the target should be a lower percentage.

Just noticed you often mix the concepts so was not sure.

After such a run up, we need lower inflation to help balance things out and help those on low fixed incomes.

We will have lower inflation I expect. But it is not "needed" to "balance out" anything.

Higher inflation was actually needed to "balance out" the 1.5% average from 2009-2020 to the long-term average of 2.5-3% which have prevailed for decades.

Recency bias and perhaps other factors cause us to forget or misremember.

 

[GenXguy]

Shouldn't it be, 1.04*1.04=1.0816, 8.16%

Math is not your thing I guess? Maybe your inflation is not actually that bad after all

LOL. It was right. I used your formula of the annual inflation rate times annual inflation rate. Just now, I asked AI so it could explain the math to you:

 

[GenXguy]

Just noticed you often mix the concepts so was not sure.

I've actually NEVER have mixed the concepts and have specifically distinguished between them often in past posts, which you could search for and see for yourself, including in my exact response to you in the other thread within just the last day.

Recency bias doesn't come into play when we're looking at long term statistics which show inflation running well above a 2% average inflation rate (Fed target is 2% PCE, not sure I should have to point that out every time, but I know it confuses you if I don't mention PCE). But indeed, hopefully we will get some lower inflation eventually for an extended time to bring us closer to a 2% average inflation rate.

 

[Montecfo]

LOL. It was right. I used your formula of the annual inflation rate times annual inflation rate. Just now, I asked AI so it could explain the math to you:
View attachment 64697

My perhaps too subtle joke which I did not think you would miss is that inflation where you live is many times the rate others experience, based on your recurring and consistent comments to that effect.

 

[GenXguy]

My perhaps too subtle joke which I did not think you would miss is that inflation where you live is many times the rate others experience, based on your recurring and consistent comments to that effect.

I knew what you were trying to say, but I thought I would have some fun with it myself. Anyway, I'm in touch with many people outside of this area that report the same thing - it's not just here.

 

[Graybeard]

So, inflation is not effecting me as far as running out of money or not being able to afford things. I have had some big expenses over the past few months and years but I just transfer the money from the Vanguard Treasury Money Market in my taxable account and pay the bill. I am thankful I have the ability to do that without worrying. Now I used to sweat monthly bills and price increases at the grocery store decades ago being frugal, today it is just money and without bragging, which I am not, I just don't care. I have forced myself to not worry about prices and spend more freely even though I'd say I am still somewhat frugal cuz old habits are hard to break!

Audrey's OP just shows inflation has basically doubled in the past 26 years and many of you have shown the same thing. I built my house in late 1998 and paid off the mortgage in 2010. In late 2002, 5 years before I FIRED, my net worth x house was $180k, when I retired in mid 2007 x house it was $566k, today x house it has increased by 3.2 times. No inheritance, I never earned close to a 6 figure salary, I just invested wisely and did not buy things I didn't need. I don't travel and I only have bought used cars except in 1973 and I still have that one! I live in a very expensive state, don't come here if you are counting your dollars so my COL is not low!

So this is why I really don't care what anything costs anymore, at age 75 I seriously doubt I could ever spend what I have short of some extended catastrophic medical problem that my 2 LTC policies would help pay. I realize some are better off than me and some are worse off. I'm not in competition, I just buy what I need and am amazed how what I have invested has grown but that is thanks to the appreciation in the stock market. 3.5 to 4% inflation over the past 26 years has helped vs the extreme inflation and mortgage rates in the 1970s into the early 80s, I am sure some of you remember that.

 

[Montecfo]

I knew what you were trying to say, but I thought I would have some fun with it myself.

Fair enough. Recognizing it is a start. And the longest journey begins with a single step.

Anyway, I'm in touch with many people outside of this area that report the same thing - it's not just here.

There are dour folks all around, yes. I think folks that remain positive and try not to emulate them are the happiest.

But that is just me.

 

[Turbo29]

LOL. It was right. I used your formula of the annual inflation rate times annual inflation rate. Just now, I asked AI so it could explain the math to you:
View attachment 64697

If something is $100, then after 4% inflation it costs $104 or 1.04x$100. Then if you inflate it by 4% again, it costs $108.16 or 1.04x$104. AI can be horrible at math.

 

[Brett_Cameron]

Our current house is (property tax) valued at just over 1000% more than our first house (Jun 1982). It would definitely sell for closer to over 1200% more than our first house cost. How's that for lifetime inflation?

Yeah, to put today's prices in perspective, I just divide by 10 and compare to what I think prices were back in the day (70's) and I don't feel the shock.

 

[GenXguy]

If something is $100, then after 4% inflation it costs $104 or 1.04x$100. Then if you inflate it by 4% again, it costs $108.16 or 1.04x$104. AI can be horrible at math.

Did you see the post I responded to?

It said "(Annual inflation rate)x(annual in inflation rate) = Inflation rate in Genxguy-ville"

That is the formula I used. AI was actually 100% correct based on that formula presented by the other poster.

You're doing something completely different - adding the same amount of inflation on top of the original inflation, not multiplying inflation rates. Apples and oranges. See AI's explanation.

 

[GenXguy]

Fair enough. Recognizing it is a start. And the longest journey begins with a single step.

Yes, I recognized it as nonsense, which is why I showed the result of your equation? lol Anyway, let's just hope things can get under control, but in the meantime, I'm paying these huge increases in homeowner's insurance for far less coverage and much higher deductible, and it appears I'm not alone from seeing many others post about these increases. Gas is still about $3.85/gal here, well above where it was some months back.

It's no surprise people are seeing inflation double over 20 years. I think it's even faster with my personal inflation, which is not to be confused with personal spending.

 

[Flieger]

Filled up truck at $3.05/Gal yesterday evening. First time in almost 3 weeks! Have big 4th Party at the Brewery so heading that way in a few to get things ready! Stay hydrated everyone, it's Hot out there!

Flieger

 

[Montecfo]

I responded in the other thread. Hopefully we can somehow get those numbers down closer to the Fed's 2% target (which is based on PCE, not CPI).

That's where you seem to mix them. CPI and PCE measure different things. PCE is generally lower than CPI because it reflects substitution of goods, for example. So a CPI that is equivalent to the PCE at the same point will be several tenths higher. For this reason, wishing CPI would tack closer to the target for PCE strikes me as a bit of nonsense.

But my larger point is that if you look at long periods of time, we are not in a period of unusually high inflation.

And inflation averaging 3% or so is pretty normal. This is what most of us assume in our retirement planning.

And if you notice, CPI runs at 2% or below only quite rarely. And when it does, it usually is reflecting poor economic conditions.

So when you hope for such low inflation figures you are in essence hoping for a very weak economy. Overall, that is viewed as highly undesirable by policy makers and most people.

So while it is fair to wish for lower inflation, and I think we will get that, 1-2% is probably not in the cards at least not for long.

Now, I return you to an interesting discussion and a bit too much hand-wringing.