Inflation is in the news right now and like many topics - information is provided without context - and serves to frighten and mislead people. “Fake News” is not necessarily blatantly fake - but is “so tilted” to get headlines and eyeballs watching, that it completely misleads.
What is inflation? The exact same products and services tend to cost more over time. That simple. It’s the “purchasing power” of a dollar erodes over time. Think of a crotchety old person saying, “I remember when candy bars cost a nickel!”
What do you need to know? Inflation is real and normal. For financial planning purposes and to make sure you have enough money to last through retirement - your advisor should help you with financial projections. If one assumes 3% annual inflation - generally considered a good long term average, then the cost of your goods and services - assuming they are identical - doubles in about 24 years. Another way to look at it - if you’re retirement is 24 years, expect prices at the end to be double from what they were at the beginning.
Each year economists and “data grinders” in our national government calculate an overall inflation rate for the entire country. I have no idea how they do that. Of course that doesn’t mean that their number is what you or I experienced.
How does inflation get hyped? For example, a “journalist” will cherry pick particular goods that have risen more than others and point them out. There will always be wide variations among individual goods inflation and you can always find those that have risen more than others. That’s normal.
Recently signs appeared of inflation increasing in various government reports. The news media makes it sound like inflation is normally zero and now we suddenly have 7%. in reality we had a very long timeframe of lower than expected inflation and it’s only jumped up recently on average. Inflation is always there.
There’s also what I would call “regional inflation”. Move from Texas to California, as we did in 1999, and everyone talks about how expensive homes are - so true. But what is also very high: gas, groceries and taxes! Licenses such as your annual fee on your auto. About the only thing not costing extra is the beautiful weather. They may figure out how to charge for that, so keep that idea under your hat.
Let’s look at groceries. As a teen I worked in Safeway grocery stores in Nebraska and learned so much about spending wisely on groceries. I loved that job and I have to say, I was a star employee. I learned a lot about how to stretch dollars shopping for groceries. It’s not coupons. My point is that to a large extent you control your own rate of inflation. Bargain and smart shopping is so helpful.
I get a kick out of polls - “75% of the people are worried about inflation” . Well of course they are - the drum beat rolls on. Don’t get me wrong - we don’t like that inflation is higher at the moment. Let’s put it into perspective. Pushing stories about inflation causes people to be concerned, then they answer a poll.
A bigger deal than inflation are interest rates. Interest rates have been very low for a long time. The good news is that the upcoming interest hikes are more of a “normalization” of rates not a tightening. Some economists such as at Vanguard think base federal interest rates will eventually rise to 3% in the next couple years which is considered a solid “normal” interest rate.
Some points about inflation:
It’s always there and normal. It’s expected. Products and services slowly increase in cost over time.
Inflation didn’t suddenly rise from zero.
Like many economic data being measured - it ebbs and flows - up and down.
Like many economic data points - it is a national measurement - it averages across the whole nation. It’s not accurate for any one family.
For long financial projections, we assume the long term average across a time horizon to be 3 to 4%. Recent decade has been extraordinarily low - so part of the “excitement “ is that it has been awhile since it mattered.
In reality, we each have our own personal rate of inflation. That’s more important to consider but would be very time-consuming to actually calculate.
Just by being a smart , flexible consumer, we can keep our own personal rate of inflation lower.
Like any economic data point that is making news - those that rapidly trade individual stocks or other securities react to the data points causing the market to rise and fall.
Volatility in the markets - and like other measures it’s always there but does ebb and flow over time.
In terms of investing, stocks, which average around 10% annually overcome inflation which averages 3-4% annually.
Investment returns relative to inflation are called “real returns”. Since you will eventually spend money being invested, you want “real growth” above and beyond inflation.
That’s why annuities must be considered carefully. Once your trigger the lifetime guaranteed income flow of an annuity, it is not keeping up with inflation - therefore its purchasing power is being eaten away each year by costs increasing.
How should you deal with the news about inflation:
Always try to ignore financial news and instead keep updating abd implementing your written financial plan. It brings a sense a peace to update and implement your plan because you’re taking action on the areas of finance that you can control.
About that written financial plan - it should be written by a professional and in such a way that it makes it easy for you to act on the advice from the plan.
Realize that the inflation numbers being reported are not necessarily a reflection of your personal rate of inflection. Examine your own budget and look for opportunities to slow the growth of your own costs.
A key element of being a smart consumer: Be flexible. The more that you demand a very specific need and demand when it is delivered - the higher the cost will be. You pay for demands!
Have concern about inflation - give us a call or email!