Nobody Talks About It - Stocks Don't Beat Inflation

[tylerrr]

Why does hardly anyone ever talk about this basic fact?

The stock market hardly ever beats REAL inflation on REAL products and services we use every day.

8% returns in the stock market do not beat real inflation, which is at least 10% per year.

Is this the Elephant in the Room that people are Censored and Disallowed from speaking about in the Media and on Forums?

[white belt]

We talk about inflation all the time here. Use the search function.

[sky]

Inflation has not always been 10%.

[ertyu]

Nah, they talk about it - mostly in the context of, "and this is why you need my subscription / my services to actively manage your portfolio." All sorts of financial professionals and grifters are currently chomping at the bit salivating over how the 60/40 is going to stop working. Iirc the first time i heard the stocks and inflation thing it was in the context of germany's war inflarions and the framing was, "actually given the extent of the disaster, you didn't lose your shirt *that* bad, stocks protected you partially

[jacob]

Because it's not a fact? The whole 10% inflation per year implies that everything gets ~7x (6.7) as expensive every two decades. That's hardly common experience or anyone's experience over the age of 30 outside the "overly on youtube"-commentariet.

Admittedly, the inflation-adjusted values are not nearly as "optimistic" as the 8-10% "get quick&easy simple rich" numbers that are often cited, ... and this is why people distinguish between real and nominal returns and why 3% real growth is more realistic for long term planning. This is hardly suppressed though. It's only a secret to those who don't read more than one book per year.

[chenda]

Yeah inflation is definitely not 10% not by a long way.

[xmj]

There's ample data from permanent endowments on long-turm capital allocations if you care to look for it. Family offices, foundations, etc that practice very long term asset-liability matching have better data than absolute return investors that contribute to their AA for a while, and then start withdrawing.

I've mentioned this here:
viewtopic.php?p=262867&hilit=permanent+ ... ts#p262867

As a simple heuristic, you *should* be able to withdraw some amount slightly higher than the dividend from your portfolio without hurting inter-generational fairness (some papers suggest ~4/3 of the dividend yields).

[zbigi]

8% returns in the stock market do not beat real inflation, which is at least 10% per year.

10% inflation a year means inflation of 4525% over 40 years. Did we really see prices increase by a factor of 45 times since 1983?

[IlliniDave]

I don't know what is meant by 'real inflation'. But real returns on stocks have historically been positive, meaning they produce return in excess of inflation. There are instances in the past where for some period of time stocks have had negative real return. One has to go back more than 40 years to find a time when inflation in the US reached 10% for a 12-month period.

[basuragomi]

Things should be 2.1x as expensive as 8 years ago at 10% inflation. Let's see:

2015-06-11 Phone bill -39.55
2023-05-01 Phone bill -39.55

2015-06-15 Rent -1050
2023-06-01 Rent -1500

2015-07-15 Transportation TTC tokens -2.8 (1 ride)
2023-06-11 Transportation TTC Presto -3.3 (1 ride)

2015-07-12 Eating Out BBT -6.77
2023-02-11 Eating Out BBT -8.50

2017-07-11 Power Hydro -42.56 (128 kWh)
2023-07-09 Power Hydro -57.72 (133 kWh)

2015-10-30 Groceries Butter -3.97
2023-03-11 Groceries Butter -4.44

2015-11-11 Groceries Milk and eggs -11.40
2023-06-11 Groceries Milk and eggs -10.17

I guess these might be insufficiently real products though.

[tylerrr]

Inflation has not always been 10%.

no it hasn't always been....

I'm saying it is now....

Every time my girlfriend and I go to the grocery store, most items cost more ....

There is no way in hell that inflation is around 4% right now like Jerome Powell and the Fed says.

I don't see that in every day life buying real things.

So my basic question is, are you really making any headway over time investing in index funds if your purchasing power is constantly getting degraded more than the official FED announcement on inflation rates?

The government has no incentive to tell the truth that our purchasing power keeps getting degraded through increased inflation.

So I'm in the minority here.
Basically everyone on this Thread is saying everything is fine.

Official inflation rates are perfectly accurate and there is nothing to this....

Meanwhile, virtually no married couple in the United States can have one spouse stay home to raise kids while the other spouse goes out and works full time to pay for a mortgage and bills.

When I grew up in the 80s, it was common that one Spouse could pay for a household while working full time. Now, hardly anyone can afford that.

But I'm crazy? Nothing has changed in inflation? It's all because we spend more than in the 80s?

[mountainFrugal]

The government has no incentive to tell the truth that our purchasing power keeps getting degraded through increased inflation.

The government has no incentive to tell people the literal definition of inflation? https://en.wikipedia.org/wiki/Inflation

[Slevin]

Lets break this down nicely.

Inflation is a weighted average of the change in the cost of many goods over the course of a year. Sometimes, shortages and shipping issues and supply issues and corporate greed and stock buybacks / literally whatever will cause the cost of a single good to go up a bunch. So you can see the cost of eggs or cheese or mayonnaise double or even more, while the total cost of "inflation" would not even notice (cost weighted average barely changed). So to get a "change in inflation in groceries", enough of the items in the bucket need to go up (or a much smaller number of things need to skyrocket, like 10x in price). Look at the third graph on this post. It is saying food costs are up about 8% this year, but individual costs of cereals and bakery products are up 12.5% and Dairy is up 8%, etc, etc. HOWEVER, the total weighting of food in the CPI is just 13.5%, so 10% inflation in food would produce just 1.35% total inflation. Thus if food prices went up 40% across the board and everything else stayed the same, we would only see a 4% inflation, while people would be feeling the relative food pains a lot more than 4%. If food went up by 40%, but energy went down 50% (oil is a volatile good), we would see only 3% overall inflation. Its complicated.

There is no grand conspiracy here. Just lots of maths and one single abstracted number that doesn't do any of the complicated details justice. You can understand why the big number is 4%, and not much higher, even though food costs numbers can be much higher. It is fine to disagree with the methodology somewhere but please find where you disagree with it instead of just shouting wolf before even trying to understand the methodology.

[tylerrr]

Lets break this down nicely.



There is no grand conspiracy here. Just lots of maths and one single abstracted number that doesn't do any of the complicated details justice. You can understand why the big number is 4%, and not much higher, even though food costs numbers can be much higher. It is fine to disagree with the methodology somewhere but please find where you disagree with it instead of just shouting wolf before even trying to understand the methodology.

I'm astonished how many people here say there is no agenda for a government to change methodology or measure whatever goods/services make the inflation rate look low or healthy.

Most of you defend government numbers and claim there is nothing nefarious coming out of a government stance?

How can you be serious?

Do most of you work for the government?

I come here to question government stance on inflation and get strong objection and pushback.

In addition, Jacob will probably lock this thread because he gets angry every time I've ever questioned the stance of a Federal Government.

Methodology is backward looking:
https://www.forbes.com/sites/georgecalh ... ccb6d871fc

[tylerrr]

Nevermind, I don't want to be argumentative here. It's a waste of time.

Probably just not the right tribe of people for me. That's all.

[IlliniDave]

There is no way in hell that inflation is around 4% right now like Jerome Powell and the Fed says.
...
But I'm crazy? Nothing has changed in inflation? It's all because we spend more than in the 80s?

It would be interesting to see some data behind your assertions.

I was a young adult in the 1980s, and part of the time in that decade inflation really was more than 10%. Home mortgage interest was over 10%. You could get CDs paying as high as 16%. Yes, a lot has changed with inflation since the 1980s, specifically the early 1980s. It's gotten much lower and is easier to contend with.

In the 80s you saw fewer cars per household, smaller home sizes with larger families in them, fewer homes with air conditioning, typically 1 TV per household, fewer people with cable, and many fewer channels for those who did, people ate out less, people flew less, no one had a computer at home, no internet, typically one phone per household, no cell phones and data plans, people at out less, much less "convenience food" from the grocery store, etc. So our basket of goods purchased annually is typically much larger now than in the 1980s.

My total spending has been going down each of the last 4 years, even while inflation has increased. It went up the 4 years prior to that even though inflation was quite low. My behavior is the driver.

Maybe there is some recency bias at work. We just came out of a period of historically low inflation. Now we're back to more historical inflation levels.

I don't like inflation. It punishes savers. It forces you to put you money at risk to keep up, and if you do keep your head above water the gov't takes some of it away. Much of the present inflation is from surreal deficit spending by the gov't. They "print" more money which devalues money already out there--it is much like a sneaky additional tax.

And yeah, the gov't has changed the way they calculate inflation . They say it more accurately reflects consumer behavior (e.g., when beef prices spike people buy more chicken and less beef, so the beef inflation is de-weighted in the calculation). Ostensibly it's a calculation of what they think people are spending versus what the identical basket of goods costs over time. It was probably a disingenuous move on their part, hard to believe anything the gov't does is not disingenuous, but it's not something they introduced in the last year or two.

[suomalainen]

no it hasn't always been....

I'm saying it is now....

Actually, you did:

8% returns in the stock market do not beat real inflation, which is at least 10% per year.

And you're still doing it:

So my basic question is, are you really making any headway over time investing in index funds if your purchasing power is constantly getting degraded more than the official FED announcement on inflation rates?

And then when people don't take you seriously, it becomes a conspiracy:

So I'm in the minority here.
Basically everyone on this Thread is saying everything is fine.

And then you change the goalposts:

When I grew up in the 80s, it was common that one Spouse could pay for a household while working full time. Now, hardly anyone can afford that.

But I'm crazy? Nothing has changed in inflation? It's all because we spend more than in the 80s?

This latter point has more to do with wages not keeping pace with inflation than inflation by itself. See, e.g., all the literature these days about growing "inequality".

But then you again change goalposts. Now we're talking about government agenda about measuring inflation?

I'm astonished how many people here say there is no agenda for a government to change methodology or measure whatever goods/services make the inflation rate look low or healthy.

I come here to question government stance on inflation and get strong objection and pushback.

My $.02 is that no one takes you seriously because ... well, because you aren't serious.

[Slevin]

I'm generally quite happy to argue and change my mind. You just haven't made any arguments other than "shadowy vibes, government has incentives to be bad". I think the CPI measurement has issues, and I'm fairly certain that CPI number is lower than I see in real life. That doesn't make it useless if it is being used to make policy change. Using MoM inflation averages to drive monetary policy would be insanely noisy and generally chaotic for everyone involved (single changes don't indicate a long term pattern). I don't know what would be the best case for change would be, maybe YoY is correct, maybe it should be shorter or longer. Unfortunately, the government isn't a tech startup, so we won't see an insanely chaotic but entertaining tuning period where they play with the numbers until they find the correct result for tamping down inflation in the best way with the best indicators (and inflation comes in many different ways, yes) as we come up against different types of inflation. Because that learning process would break and devastate real people.

Arguing that you "haven't found the right tribe to argue with, because you got push back on your ideas" is a bad thing, indicative of an echo chamber and lower rung thinking. See the article below. Bolding mine.

https://waitbutwhy.com/wop-ch-1-excerpt

RUNG 3: THINKING LIKE AN ATTORNEY

An Attorney and a Sports Fan have things in common. They’re both conflicted between the intellectual values of truth and confirmation. The critical difference is which value, deep down, they hold more sacred. A Sports Fan wants to win, but when pushed, cares most about truth. But it’s as if an Attorney’s job is to win, and nothing can alter their allegiance.

...

The Attorney treats their preferred beliefs not like an experiment that can be revised, or even a favorite sports team, but like a client. Motivated reasoning becomes obligated reasoning, and the gathering, evaluating, and puzzling processes function like law associates whose only job is to help build the case for Point B.

If someone really wants to believe something—that the Earth is flat, that 9/11 was orchestrated by Americans, that the CIA is after them—the human brain will find a way to make that belief seem perfectly clear and irrefutable. For the Attorney, the hypothesis formation stage is really a belief-strengthening process. They inevitably end up with the same viewpoints they started with, now beefed up with a refreshed set of facts and arguments that remind them just how right they are.

In the hypothesis testing phase, the Attorney’s refusal to genuinely listen to a dissenter, combined with a bag of logical fallacy tricks and their strong sense of conviction, ensures that they’re an absolutely infuriating person to argue with. The Attorney’s opponents will feel like they’re arguing with a brick wall, and by the end, it’ll be clear that nothing they could have said—nothing whatsoever—would have made the Attorney say, “Hmm that’s a good point. I need to think about that. Maybe I’m wrong.”

[Seppia]

Inflation is high now and yes probably governments have an incentive to make inflation look lower than it actually is.
But do some math
Over a span of 20-30 years one can’t cheat.
Has the price of:
A Toyota corolla
Rent for a median size apartment in Chicago/NYC/other major city
Cheeseburger
One pound of chicken breast
One flight from NYC to London
Etc etc etc

Gone up 7x since 2003?
If the answer is no (and it is no) inflation wasn’t 10% a year.

[Jean]

it's like gerrymandering, if you can justify the way you count, and you don't change it regularly to match an agenda, it's not gerrymandering.
Of course the number might be out of touch to relate to your personal experience, but i think as long there is transparency in the methodology, i wouldn't interpretate is as ill intentioned.
It would be interesting to have different inflation number for the different spending hqbits of the different income brackets.