Do We Worry About Inflation Or Not?

RealPerson · Post by **RealPerson** » Mon Jan 21, 2013 8:21 am

I happen to be among the believers in future high inflation, mainly due to the fed policy and the uncontrolled federal deficit. Last year the CPI in the US rose 1.7, lower than the average for the preceding decade. The highest outlier was medical care at 3.7% increase, whereas the lowest was piped natural gas at -2.9%. The CPI composition seems to be a reasonable reflection of household spending in America. The CPI does not seem manipulated, as I have seen suggested on this forum.
On one hand, reason would suggest that inflation go up dramatically. On the other hand, the numbers show otherwise. Debtors, of which the us government is the largest, have a vested interest in higher inflation due to the reduction in value of the outstanding principal. But, higher inflation means that Social Security spending increases also, due to its connection to the CPI. Hence, higher inflation means higher SS spending, which is the largest item on the budget. The Government seems to be in a catch 22. I guess it leaves me quite confused. Do we set up a strategy to hedge against inflation, or not? I have not invested in the PP, and I don't plan to do so in the future. How does the current situation affect your investment strategy? I have been very pleased with the stock market performance recently, but is this party coming to an end? 2012 was quite the party for those invested in the S&P500. It rose 12.1% in 2012, a whopping 10.4% real growth over inflation! The SWR last year turned out the be much higher than 3 or 4 %. In terms of real ROI, S&P500 gave its investors one of its best years.
Then one more thing to be concerned about: the trade deficit with China last year was 290 billion, or 1.8% of our entire GDP for 2012. This deficit has been rising almost exponentially, with only one dip in 2008, due to the recession. How does that figure in our investment strategy?
With additional worries such as the uncontrollable deficit, the debt ceiling political fight, maybe another downgrade of the US credit rating, the increase in taxes, the huge cost of Obamacare... the list goes on and on. The news on domestic energy production is really good, but it that enough? The party just goes on. I have this eery feeling that we are in a strange schizofrenic situation, with no rational explanation. Should I see a doctor about paranoia, or am I not alone? Sorry about the very long post but I had to get this off my chest. I greatly look forward to your thoughts and comments.

chenda · Post by **chenda** » Mon Jan 21, 2013 11:18 am

What I like about the PP is that you don't need to try and predict the future, its designed for any economic condition. Maybe you should consider it ? You can always find things to worry about for the future.

Dream of Freedom · Post by **Dream of Freedom** » Mon Jan 21, 2013 1:00 pm

During the lost decade, Japan had a similar story. A real-estate crash. Banks propped up by the government. Constant government spending to support the economy. Huge government debt. Even similar demographic trends. They didn't inflate much. They swung from periods of low inflation to periods of deflation.

JoeNCA · Post by **JoeNCA** » Mon Mar 18, 2013 7:01 pm

I had similar thoughts recently and of course the answer is to increase the savings rate of return by some means.
My concerns were inflation and taxes with expectation that they will rise in the future and to factor that into rate of return, in the ballpark - my guess is that a double digit return is needed.
As to inflation, I'll trust published CPI as far as I could throw it, and let me mind you, it isn't very far.
It's easy to see things out here in the street:
When I see rows of vacant building where established mom and pop stores once stood for decades, when I find that same burrito costing more, when it costs $5 cross the same bridge that used cost $1.25 to cross, when I see uninsured motorists roaming the roadways on bicycles, when I notice homeless more frequently, when I see booming casinos full of patrons..., well, something just doesn't add up.
IMHO, fed is forcing savers to accept real negative rate of return and to believe its imaginary CPI numbers because fed wants to keep its debt payments low, whether it's treasury interest or social security COLA.
In response, savers chase yield and take on higher risk and expectation of ruin or reduce their standard of living.
In the end, someone pays for the debt, one way or the other. There is no free lunch.

George the original one · Mon Mar 18, 2013 7:18 pm

Of course you plan for inflation in the long run and, if it doesn't appear, then you're better off.

jennypenny · Post by **jennypenny** » Mon Mar 18, 2013 7:27 pm

Has there ever been a time when inflation has consistently run ahead of basic savings rates? Even during the late '80s, passbook and CD rates seemed to stay ahead of inflation. I think that's what feels different this time.
http://inflationdata.com/inflation/Infl ... ation.aspx
http://www.bankrate.com/brm/publ/passbkchart.asp

Felix · Post by **Felix** » Mon Mar 18, 2013 8:57 pm

Both the US and Europe are currently implementing a deflationary fiscal policy. Right now, inflation is nothing to worry about.

Ego · Post by **Ego** » Mon Mar 18, 2013 9:12 pm

No mater how anti-fragile we try to be, and no matter how next-to-impossible it is to predict the future, we all must make an educated guess.
My guess, which is admittedly a layman's guess, is that we are a decade or more behind Japan marching along a similar path.

JohnnyH · Post by **JohnnyH** » Mon Mar 18, 2013 9:13 pm

I'm not worried for myself, but I'm really worried for the pensioners I know.
"Right now, inflation is nothing to worry about." Famous last words.

jennypenny · Post by **jennypenny** » Mon Mar 18, 2013 9:32 pm

@Felix--I think that's what worries me, that inflation is running ahead of savings account rates despite deflationary policies.
I worry about what it means for ER/ERE. If inflation runs ahead of safer investments, then there is no SWR for a longer than normal withdrawal period like with ER/ERE. Semi-ERE and/or significantly reduced spending would be required for all but the most talented investors.

Felix · Post by **Felix** » Mon Mar 18, 2013 11:06 pm

@jennypenny: Well, inflation is a major problem in general. I don't think inflation beat dividend stocks in terms of return. (Is that right?)

Yes, current interest rates in general are very very low. This is indeed a problem for savers as we get poor rewards for our frugality. It makes ERE that much more difficult.