Comments on: Are Inflation Rates Accelerating? How Should I Plan For It?

By: Peter

Peter — Sat, 27 Oct 2007 19:47:12 +0000

What ever happened to keeping track of your investments and adjusting? I remember a bunch of college students I overheard in the early 80’s said they were making a killing taking out student loans at 8% and investing them in CD’s at 12-14%. I’d like to think there might have been other ways to get good returns. The people who really get screwed are the ones who only have money siting in a bank account.
Sure you might not get the retirment you dreamed of, or have to work a couple of extra years, but at least you shouldn’t be stuck with nothing.

By: plonkee

plonkee — Mon, 16 Jul 2007 11:06:43 +0000

It seems unlikely that inflation in general is caused by the government printing more notes (although when they do print to excess, that certainly causes/exacerbates inflation) since most money is never printed, it exists merely in bank accounts and so on.

By: John R

John R — Sun, 15 Jul 2007 18:11:38 +0000

If you’re going to talk about money, you need to understand that inflation is a hidden govt tax. It is used to steal wealth from citizens by politicians without the problems of an actual formal tax hike.
About a month ago on the TV Wall Street Journal Report, famed investor Jim Rogers said that the govt is lying about inflation. Straight talk from somebody who knows what he’s talking about.
As our govt overspends and misallocates, they will print more dollars, causing inflation. That means your money is worth less since there are more dollars in circulation. That’s why they stopped reporting M3. That’s why they play games with “core” inflation rates and other confusing terms. They don’t want you to know the truth. And of course, most people not only don’t know, they don’t care.
Don’t rely or believe the corrupt ones in Washington. Learn all you can. It’s painful and time consuming, but better than being skinned when your $1 becomes worth 10 cents.

By: Bill

Bill — Sun, 15 Jul 2007 17:44:41 +0000

@vh is right

You can find plenty of 50+ old insurance company print ads featuring a couple happy to have retired on a $300/month annuity

Even a million dollars for retirement doesn’t seem like much money

Maybe a million plus a private pension plus social security income plus income from a few rental units. :)

By: vh

vh — Sun, 15 Jul 2007 00:46:08 +0000

The base cost of day-to-day living is what matters when you’re well into retirement: taxes, food, fuel, medicine, the roof over your head. Cars & televisions are likely to be irrelevant.

My father retired in the late 1960s after he passed his retirement goal of $100,000 (a lot more than it is today). With that money he was able to buy a house outright and cars for himself and my mother, setting them up in modest comfort with no debt. He never bought another automobile, another new television set, or another major appliance–didn’t need them.

But by the end of the 1970s, the proceeds of his investments plus his Social Security were barely enough to live on. My mother died; he promptly married a woman who had her own pension (my mother had never worked). Between the two of them, they never went hungry, but their lifestyle was a great deal more Spartan than most of us would crave. . .crammed into a three-room apartment with another adult, with no money to go out to dinner or movies or take even a short trip, is not the way I hope to spend the last years of my life.

My net worth will be at least a million dollars by the time I can collect full Social Security (in three years). A million bucks looks to me about like a hundred grand looked to my father–mighty fine! But there’s just too much probability that it won’t support a middle-class lifestyle all the way through my 80s and into my 90s. That’s why I intend to work at least until I’m 70, or until they cart me out of the place.

By: heather

heather — Sat, 14 Jul 2007 20:30:36 +0000

rkt – the CPI has already been adjusted (so-called “hedonic adjustments”) for the increasing quality of items.

http://bigpicture.typepad.com/comments/2007/01/your_personal_i.html

By: Rxforfinance

Rxforfinance — Sat, 14 Jul 2007 04:09:06 +0000

Whether TV’s or washer/dryers are same or down in price compared to a number of years ago doesn’t much matter.
That is becase you only buy those items once every 10+ years.
Sure when I buy my next washer/dryer and it is less than my last one it will be nice, but I buy milk almost every day and it has increased.

By: gordon

gordon — Fri, 13 Jul 2007 22:28:28 +0000

TVs are not down. The type of tv you are used to is now considered a bottom dollar option compared to when you first bought it. It you consider this year’s high end tv to that made ten years ago then you will see that the new tv is higher in price.

By: nightingale

nightingale — Fri, 13 Jul 2007 19:30:57 +0000

I would suggest people read this article about how the decrease in fuel supply and increasing energy expenses will influence inflation:
http://www.financialsense.com/editorials/cooke/2005/0412.html

In essence: while current inflation perhaps makes prices seem high, whether or not compared to the 1970’s this may be significant. Unfortunately, this increase today will seem little in comparison with the future years as oil prices more and more steeply affect the prices of good which rely upon energy for transit, such as food, medicines that require petroleum during production, transportation, retail, wholesale, agriculture, construction, and manufacturing enterprises, to name a few.

So inflation will most likely increase more sharply in the coming years and fuel continues to have high demand but diminishing resources.

By: Lisa

Lisa — Fri, 13 Jul 2007 13:56:18 +0000

Inflation is relative to what you purchase. Food is up big time. Milk at now $4 a gallon when 5 years ago it was $2.50. Thats way more than 2.46% per year. A movie ticket was $7 and now it is $9.50 in 5 years. The rate of inflation doesn’t count food the same way it did 20yrs ago. I would agree that some basics are down ie color tvs(not hd type)and washer/dryer. Food, gas, insurance and property taxes, base things we all need are way up. Seniors would feel these big time in their budgets.

By: Brip Blap

Brip Blap — Fri, 13 Jul 2007 10:50:05 +0000

I think Michael and j2r had good points. If you look at inflation as a whole it’s tolerable in the US. But in some areas (energy, education and health care) the growth in costs is much higher, and could really affect retirement planning. I think health care, in particular – who knows what means testing might be in place for Medicare in 20 years? That growth means that I will definitely be taking the ‘assume the worst and hope for the best’ scenario in my retirement planning.

Also, having lived in Russia during a period of hyperinflation I can say that there’s nothing so demoralizing as paying 10 for a thing one day and 18 for it a week later, let alone 340 a year later.

Plus, having your currency denominated in thousands is depressing – paying 27,000 rubles for a Big Mac was just psychologically unpleasant, even though as an American my underlying salary was dollars and it didn’t affect me as much as my Russian colleagues. I hope we never, ever see something like that in America.

By: plonkee

plonkee — Fri, 13 Jul 2007 08:29:08 +0000

I’m pretty certain that inflation in the UK was much higher in the 70s than it is now. I always try and inflation adjust my calculations so that I have a better idea of what I need and I plan for returns that are inflation + X% where x is quite small.

By: David Hunter

David Hunter — Fri, 13 Jul 2007 08:25:25 +0000

Good, I am glad you are aware of this. One thing that bugs we about many personal finance sites and especially articles is that they rarely inflation adjust the future value of money appropriately. i.e. they tell you with the magic of compound interest you can retire with a million dollars, not mentioning that that million dollars isn’t going to go a long way in 30 years…

By: UncleOxidant

UncleOxidant — Fri, 13 Jul 2007 04:59:17 +0000

Trent: I think your wife’s grandfather is absolutely correct: inflation is speeding up. The thing you have to remember is that when the CPI was calculated in the 70’s it included things like food and gasoline – stuff that normal people like you and me have to buy. However, in the 90’s the CPI was re-formulated so that food and energy are now excluded from the core rate of inflation. So, while the government may be telling us that inflation is something like 2.5%, if we were to use the old 70’s formulation it would probably be somewhere closer to 6 or 7% right now.

By: broknowrchlatr

broknowrchlatr — Fri, 13 Jul 2007 04:44:06 +0000

I won’t bore anyone with the link, but research I have seen shows that the long term REAL (inflation adjusted) return is 5%. So, I like to use this in my calculations. (8% return + 3% inflation, 9% + 4%, doesn’t matter)

By: lorax

lorax — Fri, 13 Jul 2007 04:00:27 +0000

I’m glad people pointed out that the method of scoring has changed, the values just aren’t comparable. Take a look at the individual numbers in the CPI now, many required things are rising fast but these are offset by hedonic pricing of consumer items… oh, and by cheap goods from overseas manufacturing.

Also remember that we often hear about the “core” CPI; this leaves out food and energy which have been increasing.

The CPI as it relates to TIPS and Series I bonds uses CPI-U, the urban index of inflation. Your experience in the boonies can be quite different.

By: gordon

gordon — Fri, 13 Jul 2007 03:54:23 +0000

Reminds me of the old story of the poor couples in Germany immediately after World War I. Old families near retirement had saved for years only to find in a matter of days that the money they had saved was worthless. In order to make reparations payments the German government printed money as fast as it could.

The value of currency would change so quickly that people would have to take wheelburrows of money just to buy bread. Just one more reason to diversify your investments.

By: SammyD1st

SammyD1st — Fri, 13 Jul 2007 02:33:52 +0000

Excellent point on inflation (regardless of how the actual value is calculated). Inflation is actually the very reason why I never have an “emergency fund” when I have outstanding consumer debt. Any money left in a savings account is really getting roughly 5.05% nominal APY – 2.5% inflation = 2.55%, then factor in 25% income tax on the interest to get a real return of 1.9%. In my opinion, worthless.

By: Dan

Dan — Fri, 13 Jul 2007 01:28:45 +0000

“Core” CPI, the one usually reported, is now calculated as CPI – Food and Energy so it really, in my opinion, just shows the value of cheap imports of goods and does not really reflect on inflation any more.

Try the website linked to my name (St Louis Fed)above for some charts. (Or you could just go buy a gallon of milk :-)

By: EdTheRed

EdTheRed — Fri, 13 Jul 2007 01:00:57 +0000

In Fort Lauderdale, Florida in 1999 we were paying $1.19 per gallon of gas. Others say we were paying $1.17 per gallon (http://www.floridataxwatch.org/research/researchreports/gastax.html bottom of page) but that’s close enough for Rock & Roll.

Today we are paying $2.89 per gallon.
It’s been pretty much been acknowledged that our economy lives and dies on energy. Much of this energy comes from oil. If you use the projected price of oil in the next ten years as your guide you’ll have a pretty good grip on what inflation will be.

If you are optimistic then by all means factor in things like greater efficiency, alternative fuels including nukes and (for consumers) hybrid engines*.

BTW, I plan to ignore (again, my own opinion, I may be wrong) hydrogen cars, at least until it is practical to manufacture it cheaply, to deliver it economically, and to store it easily.

*The internal combustion part of the equation can and should be designed to run on gas, LP, ethanol E85, etc., i.e. true flex-fuel vehicles.