Here's what got me thinking about this:
I was watching the local news, and they reported on a local roller coaster called the Cyclone that was celebrating its 85th anniversary with a special discounted ticket price this weekend. They said that a ticket to ride the Cyclone was 25 cents when it opened in 1926. According to this inflation calculator (http://www.westegg.com/inflation/infl.cgi), that was 3.05. I haven't been to this roller coaster, so I could be wrong, but I highly doubt it costs $3 today.
Now, most people would call me pedantic for even talking about this, but not you guys. This has got me thinking about real inflation versus CPI and inflation averages. While some things clearly rise steadily (subway fares here in NYC are a good example), the cost of other things rise more unpredictably or stay near flat (I pay the same for a haircut today that I did 10 years ago).
The uneven nature of inflation has big implications for ERE. If I can boil down my basic needs to a few key items and identify the inflation trends for those items, I might be able to shave a bit off the amount I need to retire. The question is, would this calculation be worth making? Has anyone else thought about this and come up with a solution?
I don't understand inflation
I don't think the CPI would give a very meaningful measure of real cost of the roller coaster ride in 1926 as consumer spending will have changed so much in 95 years. A better measure may be its cost relative to average income in 1926 - my guess this would show the real cost has fallen.
Measuring inflation trends for essentials is goIng to be difficult - food and heating costs have obviously fallen astronomically in the last few hundred years (relative to average income) though I don't think you can make a meaningful measure of, say, healthcare costs over such a long period, as the technology of healthcare has changed so fundamentally.
This site has some interesting historical comparisons: www.measuringworth.com
Measuring inflation trends for essentials is goIng to be difficult - food and heating costs have obviously fallen astronomically in the last few hundred years (relative to average income) though I don't think you can make a meaningful measure of, say, healthcare costs over such a long period, as the technology of healthcare has changed so fundamentally.
This site has some interesting historical comparisons: www.measuringworth.com
Different countries have a different basket of goods (not normally services) that they use to measure inflation.
This basket changes over time.
Its worth looking at your countries details on what they use to measure inflation.
Because inflation is unpredictable and I like to be simple, I assume prices at least double every 20 years.
I have a very simple basket of goods and services and I just watch the prices, make my own judgements. Have been doing it for years, sounds like what you're up to.
It makes sense, noone buys the same goods and services.
This basket changes over time.
Its worth looking at your countries details on what they use to measure inflation.
Because inflation is unpredictable and I like to be simple, I assume prices at least double every 20 years.
I have a very simple basket of goods and services and I just watch the prices, make my own judgements. Have been doing it for years, sounds like what you're up to.
It makes sense, noone buys the same goods and services.
I've spent a LOT of time thinking about this. Inflation is a slippery devil.
Inflation is commonly measured with the CPI, or the CPI-*, where *= whatever version you wish to use instead of CPI, commonly *=U. It's easy to notice that the numbers don't always add up to real life experience. If you want to see an interesting discrepancy, look at the CPI numbers and look at the Social Security numbers-- if you adjust SS numbers for inflation based on the CPI data, it doesn't line up. So I can't help but wonder if those wierdos who keep arguing that the govt is manipulating inflation data aren't actually at least somewhat right.
Many articles will calculate investment returns using historically average stock market returns adjusted with average inflation, and remarking that average inflation is 3.1%. To me this makes 0% sense. So far as I can tell the effect of inflation is quite personal, and the average value isn't all that useful to the individual. To a certain extent, average inflation is like average wages... it doesn't matter if the average wage went up 2% in a year if you lost your job and were unemployed for 9 months.
What seems to matter most in terms of inflation is if your wages keep pace with inflation, or I guess if you're retired it's your investment earnings rather than wages. I've argued a million times over that if your wages don't keep pace with inflation-- a very personal calculation-- that a 30 year housing mortgage becomes less affordable with time rather than more affordable, only to be drowned out by the chorus of those who have mastered the mantra of "inflation favors the debtor."
Inflation is commonly measured with the CPI, or the CPI-*, where *= whatever version you wish to use instead of CPI, commonly *=U. It's easy to notice that the numbers don't always add up to real life experience. If you want to see an interesting discrepancy, look at the CPI numbers and look at the Social Security numbers-- if you adjust SS numbers for inflation based on the CPI data, it doesn't line up. So I can't help but wonder if those wierdos who keep arguing that the govt is manipulating inflation data aren't actually at least somewhat right.
Many articles will calculate investment returns using historically average stock market returns adjusted with average inflation, and remarking that average inflation is 3.1%. To me this makes 0% sense. So far as I can tell the effect of inflation is quite personal, and the average value isn't all that useful to the individual. To a certain extent, average inflation is like average wages... it doesn't matter if the average wage went up 2% in a year if you lost your job and were unemployed for 9 months.
What seems to matter most in terms of inflation is if your wages keep pace with inflation, or I guess if you're retired it's your investment earnings rather than wages. I've argued a million times over that if your wages don't keep pace with inflation-- a very personal calculation-- that a 30 year housing mortgage becomes less affordable with time rather than more affordable, only to be drowned out by the chorus of those who have mastered the mantra of "inflation favors the debtor."
@Mo: "So I can't help but wonder if those wierdos who keep arguing that the govt is manipulating inflation data aren't actually at least somewhat right."
I'll cop to being one of those weirdos. When the Fed stopped reporting M3, I found that suspicious. And everything I've seen since has reinforced that suspicion. I believe they want us to "pay no attention to that man behind the curtain" since their current plan looks like this:
1. Government spends in excess of its receipts, and keeps increasing spending
2. Government borrows money to pay for its spending in excess of receipts
3. The Federal Reserve creates more and more money out of thin air to pay our debts and provide "quantitative easing" to our economy.
4. ?
5. Budget surplus and national debt retired!
They'll keep running the printing presses to pay our debts until they no longer can, and then it's on to #4. Unfortunately, no one has come up with a politically viable #4 yet. And then there's the roughly $60T in unfunded obligations that will come due within the next couple of decades (http://www.usatoday.com/news/washington ... debt_n.htm ). But by then inflation will likely have taken a much bigger toll than the 3% per year I see many here and elsewhere planning for in their estimates.
Man, if anyone ever needed to learn the principles of ERE, it's our Uncle Sam. I'll admit, I'm regretting co-signing on his loans. But we'll be paying them back with inflated dollars, so that's at least a small victory.
I'll cop to being one of those weirdos. When the Fed stopped reporting M3, I found that suspicious. And everything I've seen since has reinforced that suspicion. I believe they want us to "pay no attention to that man behind the curtain" since their current plan looks like this:
1. Government spends in excess of its receipts, and keeps increasing spending
2. Government borrows money to pay for its spending in excess of receipts
3. The Federal Reserve creates more and more money out of thin air to pay our debts and provide "quantitative easing" to our economy.
4. ?
5. Budget surplus and national debt retired!
They'll keep running the printing presses to pay our debts until they no longer can, and then it's on to #4. Unfortunately, no one has come up with a politically viable #4 yet. And then there's the roughly $60T in unfunded obligations that will come due within the next couple of decades (http://www.usatoday.com/news/washington ... debt_n.htm ). But by then inflation will likely have taken a much bigger toll than the 3% per year I see many here and elsewhere planning for in their estimates.
Man, if anyone ever needed to learn the principles of ERE, it's our Uncle Sam. I'll admit, I'm regretting co-signing on his loans. But we'll be paying them back with inflated dollars, so that's at least a small victory.
Since my boyfriend intends to spend most of his time on a computer, using only electricity and a few bucks for a few games, I figure we will need less money in retirement (computers get cheaper over time while increasing capacity; electricity is getting more expensive but solar panels are getting cheaper now).
I am not too worried about inflation so far. We still do not live in countries like India or Venezuela...
I am not too worried about inflation so far. We still do not live in countries like India or Venezuela...
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secretwealth
- Posts: 1948
- Joined: Mon Jun 27, 2011 3:31 am
I think a lot of fear about inflation comes from:
1. Libertarian ideologies that preach against government debt by conflating macro and microeconomic theories
2. Recent spikes in commodity costs due to speculation and higher demand in emerging markets, especially China and India
#1 is an ideology and so can only be discussed in ideological terms, which I don't like doing. #2 is more manageable. We've seen demand fall in China particularly in recent months, which has caused commodity prices to fall, and the quantitative easing of recent years had almost no impact on inflation. These are the two main reasons why I'm not too worried about inflation for goods. Technological improvements will probably make goods cheaper to produce in the long term, just as they have in the past. That's a third reason not to worry about inflation too much.
I'm optimistic on the issue of inflation; perhaps more than most would be. The industries that see the highest rises in costs (higher education and health care, particularly), are also the most bloated and inefficient. External pressures will hinder that trend, if they haven't already.
1. Libertarian ideologies that preach against government debt by conflating macro and microeconomic theories
2. Recent spikes in commodity costs due to speculation and higher demand in emerging markets, especially China and India
#1 is an ideology and so can only be discussed in ideological terms, which I don't like doing. #2 is more manageable. We've seen demand fall in China particularly in recent months, which has caused commodity prices to fall, and the quantitative easing of recent years had almost no impact on inflation. These are the two main reasons why I'm not too worried about inflation for goods. Technological improvements will probably make goods cheaper to produce in the long term, just as they have in the past. That's a third reason not to worry about inflation too much.
I'm optimistic on the issue of inflation; perhaps more than most would be. The industries that see the highest rises in costs (higher education and health care, particularly), are also the most bloated and inefficient. External pressures will hinder that trend, if they haven't already.
The CPI tracks a basket of goods and services that includes items most EREista's aren't going to be using as frequently, if at all (e.g. durable goods, air travel); so I find it less than helpful in forming my personal outlook.
My biggest concern is food infation. As China continues to develop, many in that country are developing a taste for Western-style food patterns, including greater meat consumption. The diversion of corn to cattle feed and ethanol production led to demand-induced shortages that spiked the cost of corn tortillas in Mexico. I would be concerned about similar spikes in staple foodstuffs here, particularly cheaper cuts of meat. I've noticed that lesser quality cuts of beef have risen by almost 100% over the past two years in California. Similarly, chicken thighs have gone from being a sub-$1 per pound item to being more expensive than breasts. I eat far more pork now than I used to do because it remains relatively inexpensive.
The EREistas' ability to time the buying cycle and avoid impulse purchases should mean that the cyclical inflation of certain things like tools or clothing can be gamed in favor of the EREista.
My conclusion is that inflation will be less onerous for us than for the general population.
My biggest concern is food infation. As China continues to develop, many in that country are developing a taste for Western-style food patterns, including greater meat consumption. The diversion of corn to cattle feed and ethanol production led to demand-induced shortages that spiked the cost of corn tortillas in Mexico. I would be concerned about similar spikes in staple foodstuffs here, particularly cheaper cuts of meat. I've noticed that lesser quality cuts of beef have risen by almost 100% over the past two years in California. Similarly, chicken thighs have gone from being a sub-$1 per pound item to being more expensive than breasts. I eat far more pork now than I used to do because it remains relatively inexpensive.
The EREistas' ability to time the buying cycle and avoid impulse purchases should mean that the cyclical inflation of certain things like tools or clothing can be gamed in favor of the EREista.
My conclusion is that inflation will be less onerous for us than for the general population.
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secretwealth
- Posts: 1948
- Joined: Mon Jun 27, 2011 3:31 am