Latest Inflation Numbers and Discussion

[Aerides]

I seem to recall in my early days of retirement planning, and first learning about the 4% rule, the expectation for inflation in your targets would be 3%.

Basically, on average, if your investments earned 7%, inflation took 3%, and you had 4% for your SWR.

So, anyone planning to retire and expecting a 2% inflation average on the long haul is going to have a higher risk of failure. I don't care what the FED goal is, so much as I care that I have planned for to allow for a financially secure future in retirement.

 

[ShokWaveRider]

We are not as well of as others here either. However, we really did not change our habits re spending. Yes, we noticed it. Did it affect our daily lives? Not really.

 

[FREE866]

We are not as well of as others here either. However, we really did not change our habits re spending. Yes, we noticed it. Did it affect our daily lives? Not really.

Same. Another way I look at it is that inflation has allowed corporations to raise prices and help their profits which help their stock price to an extent . So owning stocks have helped out my overall picture.

 

[audreyh1]

We are not as well of as others here either. However, we really did not change our habits re spending. Yes, we noticed it. Did it affect our daily lives? Not really.

Same here. Ironically we were underspending for a long while since our portfolio was doing so well. Inflation has closed some of that gap.

Also our net worth is not nearly ahead of inflation as much as it was before 2020. Oh well, at least it’s still ahead (knock on wood).

 

[ShokWaveRider]

We are actually spending more and more as we cannot take it with us and have no heirs. Our investible assets are still increasing more than we spend and we do not invest in the stock market anymore either.

 

[Chuckanut]

True, but perhaps the goal posts weren't in the right place to begin with so it is just fixing it.

That’s possible. And, it would be nice if whoever owns the stadium admitted the error and told us of the fix. After all, it could likely change some of the game plans.

 

[Teacher Terry]

Over the past 3 years I have either eliminated or substituted for a cheaper option many things such as cellphone plans, cable, etc. It really pays to look for cheaper options. I also don’t eat out as often and drink water when I do because the price of any kind of drink is ridiculous. I literally examined everything in my budget.

 

[Dtail]

The Fed introduced the 2% inflation target during a period when inflation was lower than 2% and worryingly close to zero. The Fed (and everyone else) was worried about persistent deflation. It first came out as a floor, not a ceiling, and when very low inflation persisted, it was also discussed as a possible multi year average, meaning the Fed might allow for multiple years above 2%.

The Fed is more concerned with price stability over time, not hitting the 2% on the nose. If average inflation and inflation expectations remain anchored around 2.5% +/- 0.5% the Fed is likely to remind us it is concerned, but not likely to take any action. It is more likely to take action if inflation looks to trend below 2% or above 3%, or if the economy starts to head toward recession.

Thus if there are no decreases in rates this year, will the stock market head downwards as a direct causation?

 

[GenXguy]

I seem to recall in my early days of retirement planning, and first learning about the 4% rule, the expectation for inflation in your targets would be 3%.

Basically, on average, if your investments earned 7%, inflation took 3%, and you had 4% for your SWR.

So, anyone planning to retire and expecting a 2% inflation average on the long haul is going to have a higher risk of failure. I don't care what the FED goal is, so much as I care that I have planned for to allow for a financially secure future in retirement.

Even assuming 3% or the inflation figure in retirement would be way behind when you look at the actual cost increases of the largest bills in recent years, like homeowner's insurance, home repairs/maintenance, property tax, car insurance, to name a few, on top of rising utilities, food costs, health care costs, and more that exceed that. 3% wouldn't have even accounted for half of the additional expense. I have the funds available to cover thanks to a big enough buffer for discretionary spending that I can pull from. I'm still on my first year of retirement and spend a fraction of the discretionary $ that I had originally allocated in my retirement budget while spending a lot more on the required expenses.

 

[Chuckanut]

Medical care is a big part of the USA economy so this may be important to future inflation rates:

Hospital prices specifically jumped 7.7% last month from a year ago, the highest increase in any month since October 2010, the Labor Department said Wednesday.

5/18/24. WSJ

 

[youbet]

Same. Another way I look at it is that inflation has allowed corporations to raise prices and help their profits which help their stock price to an extent . So owning stocks have helped out my overall picture.

Actually, it's the other way around. Sellers raise prices because they are in the inelastic portion of their demand curve. The aggregate of those higher prices = inflation. Inflation is a measure of aggregate price increases, not a number which allows price increases.

 

[Aerides]

Sellers raise prices because they are in the inelastic portion of their demand curve.

Well that's one reason. There are others - and "because I can, because all prices are going up so I might as well do the same" is also a reason. And the amount of the increase of the new price may well exceed the increase of the opex behind the item.

 

[FREE866]

Actually, it's the other way around. Sellers raise prices because they are in the inelastic portion of their demand curve. The aggregate of those higher prices = inflation. Inflation is a measure of aggregate price increases, not a number which allows price increases.

Sure it does. It's about their cost of goods. Corporations easily pass on any increases of cost of goods to the consumer. Additionally , when that starts happening they tend to increase prices above and beyond that as a buffer. The proof is in the numbers ---corporate profits were at record levels in 2023 and have continued into 2024. The stock markets excellent returns in 2023 and so far in 2024 have reflected that.

 

[FREE866]

Well that's one reason. There are others - and "because I can, because all prices are going up so I might as well do the same" is also a reason. And the amount of the increase of the new price may well exceed the increase of the opex behind the item.

Exactly.

 

[youbet]

Well that's one reason. There are others - and "because I can, because all prices are going up so I might as well do the same" is also a reason. And the amount of the increase of the new price may well exceed the increase of the opex behind the item.

"because I can" That's because they're in an inelastic portion of their demand curve, no?

 

[youbet]

Sure it does. It's about their cost of goods. Corporations easily pass on any increases of cost of goods to the consumer. Additionally , when that starts happening they tend to increase prices above and beyond that as a buffer. The proof is in the numbers ---corporate profits were at record levels in 2023 and have continued into 2024. The stock markets excellent returns in 2023 and so far in 2024 have reflected that.

It's not always as easy for sellers to pass on increased costs as you imply FREE866. In many industries yes, in others, not so much.

But my disagreement is with your original statement that "inflation has allowed corporations to raise prices." I agree that inflation tends to feed on itself as consumers become accustomed to ongoing increases in prices over time and become less resistant to price increases. But this cycle started when excess demand was created by various (political - not be mentioned here) events and that demand caused/allowed sellers to raise prices. The aggregate of the increased prices is measured as "inflation."

It's just a "horse before the cart thing." "Stimulative spending increased demand. Increased demand allowed higher prices. Higher prices were measured and the outcome of that measurement is a number called "inflation."

 

[Chuckanut]

Price is a function of supply and demand.

If my cost of making pencils rises to $1 I can try to increase the price, but I doubt I would get away with it very long. OTOH, if we are in a long term heat wave, nobody has window air conditioners in stock, I might be able to sell my extra window AC for more than the price of a new one last January.

 

[DJRR]

Medical care is a big part of the USA economy so this may be important to future inflation rates:

5/18/24. WSJ

Wonder if they track list or net? For ex: My wife just spent a visit to the emergency room. Bill was $15k insurance contracted rate was $3k and I paid $38 because she has hit her out of pocket maximum for the year with this bill.

 

[USGrant1962]

Wonder if they track list or net? For ex: My wife just spent a visit to the emergency room. Bill was $15k insurance contracted rate was $3k and I paid $38 because she has hit her out of pocket maximum for the year with this bill.

BLS tracks actual prices paid. Though medical is messy because there is a 3rd party payer and what you pay has nothing to do with price or cost. In your example I believe BLS would use $3K - what the provider was paid (by you and your insurer). So neither "list" at $15K or "net" to you at $38.

 

[Montecfo]

Over the past 3 years I have either eliminated or substituted for a cheaper option many things such as cellphone plans, cable, etc. It really pays to look for cheaper options. I also don’t eat out as often and drink water when I do because the price of any kind of drink is ridiculous. I literally examined everything in my budget.

Well, yes. We do many of these things also. But they are not really new. We are just value oriented.

Even if I can afford something I may still refuse to afford it!

 

[MichaelB]

Thus if there are no decreases in rates this year, will the stock market head downwards as a direct causation?

No one knows the answer to that question. Over short periods stock prices are behavioral and reflect future expectations as well as current conditions,

 

[Gumby]

No one knows the answer to that question. Over short periods stock prices are behavioral and reflect future expectations as well as current conditions,

As the old saying goes, in the long run the stock market is a weighing machine. In the short run it's a voting machine.

 

[Montecfo]

Currently the market perception is that the next Fed move will be a rate cut. As long as that remains the perception we are fine.

 

[FREE866]

It's not always as easy for sellers to pass on increased costs as you imply FREE866. In many industries yes, in others, not so much.

But my disagreement is with your original statement that "inflation has allowed corporations to raise prices." I agree that inflation tends to feed on itself as consumers become accustomed to ongoing increases in prices over time and become less resistant to price increases. But this cycle started when excess demand was created by various (political - not be mentioned here) events and that demand caused/allowed sellers to raise prices. The aggregate of the increased prices is measured as "inflation."

It's just a "horse before the cart thing." "Stimulative spending increased demand. Increased demand allowed higher prices. Higher prices were measured and the outcome of that measurement is a number called "inflation."

Ben Carlson succinctly sums up my original point:

Corporations are paying higher wages and input costs but they simply raised prices to combat those higher costs.

Corporate America puts profit first, second, and third, which is one of the reasons the stock market is so resilient.

If it seems like corporations always win it’s basically true. They know how to adapt regardless of the macro environment.

That’s why profit margins have only improved during the highest inflation in four decades.

 

[Wile E. Coyote]

I remember there were wink wink nudge nudge type questions about an inflation target to the Fed from the press all the way back with Greenspan in the 90s. Sounds like it had been discussed for decades before 2012.

Yes, they taught the 2% in Econ in college in the 90's. It's been around for a long, long time.