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brucec42
12-03-07, 08:56 PM
Or not?

I was until recently under the impression that the CPI posted by the govn't understated inflation since it excludes some "volatile" items that are much higher priced recently. Then I started thinking about it.

What I came up with that 'seems' significantly MORE expensive to me:"

Fuel and related costs like utilities, air travel, etc
Food
Healthcare and insurance for it
Education

What I could think of that is significantly LESS expensive lately:

Vehicles - with rebates a pickuptruck I paid $25,000 for in '99 can be replaced with a very comparable one for ....$25,000 today. And in '03 I had to pay $34,000 to get a car with safety features and performance that I can find in a $27,000 car today. And a reg cab pickup (dodge ram I paid $23,300 out the door for in '03 I can now replace exactly (with a few added features tossed in) for $22,000.

Electronics - From flat panel tvs to GPS units, prices are much lower.

Clothing - I don't buy a lot, but I'm not seeing any noticeable price increases for the stuff I buy

Auto insurance - On all 3 vehicles, business and personal, our rates have gone down slightly in the last few years.

Life insurance - Rates have dropped a lot.

Real Estate - This one is trickier. Home prices have definitely fallen, as have rents in the area I live in. But ARM's on home mortgages are resetting quite a bit higher. Still, the "equivilent rent" seems lower vs a couple years ago.

So, when they forecast something like 1.8% inflation for each of the next couple of years, is this accurate or not? Or is this something you can even give a single answer to?

I guess if one already owns a home with a fixed rate mortgage, doesn't drive or fly much, doesn't have kids to educate, has a job that provides excellent health insurance, but likes to buy new cars and electronics or wants to rent a home, then inflation may not be much of a problem at all, even with the money supply surging and the dollar falling.

Finally, long-term, what kind of assumptions would make sense about how much to save for retirement in this type of atmosphere? I would appreciate input as I am not a "financial guy". Thanks.

zoog
12-03-07, 10:07 PM
Or not?

I was until recently under the impression that the CPI posted by the govn't understated inflation since it excludes some "volatile" items that are much higher priced recently. Then I started thinking about it.

What I came up with that 'seems' significantly MORE expensive to me:"

Fuel and related costs like utilities, air travel, etc
Food
Healthcare and insurance for it
Education

What I could think of that is significantly LESS expensive lately:

Vehicles - with rebates a pickuptruck I paid $25,000 for in '99 can be replaced with a very comparable one for ....$25,000 today. And in '03 I had to pay $34,000 to get a car with safety features and performance that I can find in a $27,000 car today. And a reg cab pickup (dodge ram I paid $23,300 out the door for in '03 I can now replace exactly (with a few added features tossed in) for $22,000.

Electronics - From flat panel tvs to GPS units, prices are much lower.

Clothing - I don't buy a lot, but I'm not seeing any noticeable price increases for the stuff I buy

Auto insurance - On all 3 vehicles, business and personal, our rates have gone down slightly in the last few years.

Life insurance - Rates have dropped a lot.

Real Estate - This one is trickier. Home prices have definitely fallen, as have rents in the area I live in. But ARM's on home mortgages are resetting quite a bit higher. Still, the "equivilent rent" seems lower vs a couple years ago.

So, when they forecast something like 1.8% inflation for each of the next couple of years, is this accurate or not? Or is this something you can even give a single answer to?

I guess if one already owns a home with a fixed rate mortgage, doesn't drive or fly much, doesn't have kids to educate, has a job that provides excellent health insurance, but likes to buy new cars and electronics or wants to rent a home, then inflation may not be much of a problem at all, even with the money supply surging and the dollar falling.

Finally, long-term, what kind of assumptions would make sense about how much to save for retirement in this type of atmosphere? I would appreciate input as I am not a "financial guy". Thanks.

Bart has a detailed page that you should find helpful:
http://www.nowandfutures.com/cpi_lie.html

The CPI is comprised of various categories. Some have inflated tremendously. Others not so much. Some have even deflated. The BLS has been monkeying with the calculations for many many years to maximize the impact of low- or no-inflation categories, and minimize the impact of high-inflation categories, to make the overall number appear low.

The page linked above has some adjustment factors by year to attempt to reconcile official CPI with "real" inflation. The adjustment for 2006 is 6%. Add that onto the official October YOY% of 3.5% and you get 9.5% inflation. (Alternately, there is a more conservative factor of 4.5%, giving you 8% inflation.)

A well-known (in these circles at least) website that offers alternative inflation calculations is http://www.shadowstats.com/cgi-bin/sgs. Currently they show just under 7% using the pre-1990's BLS formulas.

I have seen other estimates of 6%. Regardless of which methodology you subscribe to, it is clear that the official numbers are bogus. I don't forsee a time when the official CPI will ever be at or above actual inflation.

As for long-range predictions of inflation, it's a wild guess for anyone. For my own financial planning and projections, I have assumed for the next 10 years that inflation will average 10% a year. After that it may subside somewhat. For multi-decade planning, I think you could assume an average of 6% a year. Others may have different opinions.

Jim Nickerson
12-04-07, 12:47 AM
Or not?

I was until recently under the impression that the CPI posted by the govn't understated inflation since it excludes some "volatile" items that are much higher priced recently. Then I started thinking about it.

What I came up with that 'seems' significantly MORE expensive to me:"

Fuel and related costs like utilities, air travel, etc
Food
Healthcare and insurance for it
Education

What I could think of that is significantly LESS expensive lately:

Vehicles - with rebates a pickuptruck I paid $25,000 for in '99 can be replaced with a very comparable one for ....$25,000 today. And in '03 I had to pay $34,000 to get a car with safety features and performance that I can find in a $27,000 car today. And a reg cab pickup (dodge ram I paid $23,300 out the door for in '03 I can now replace exactly (with a few added features tossed in) for $22,000.

Electronics - From flat panel tvs to GPS units, prices are much lower.

Clothing - I don't buy a lot, but I'm not seeing any noticeable price increases for the stuff I buy

Auto insurance - On all 3 vehicles, business and personal, our rates have gone down slightly in the last few years.

Life insurance - Rates have dropped a lot.

Real Estate - This one is trickier. Home prices have definitely fallen, as have rents in the area I live in. But ARM's on home mortgages are resetting quite a bit higher. Still, the "equivilent rent" seems lower vs a couple years ago.

So, when they forecast something like 1.8% inflation for each of the next couple of years, is this accurate or not? Or is this something you can even give a single answer to?

I guess if one already owns a home with a fixed rate mortgage, doesn't drive or fly much, doesn't have kids to educate, has a job that provides excellent health insurance, but likes to buy new cars and electronics or wants to rent a home, then inflation may not be much of a problem at all, even with the money supply surging and the dollar falling.

Finally, long-term, what kind of assumptions would make sense about how much to save for retirement in this type of atmosphere? I would appreciate input as I am not a "financial guy". Thanks.

Bruce, I think you can make all the assumptions with which you or anyone else can come up, and the problem is that they are all ASSUMPTIONS, none of which will you ever control.

What you experience on a day-to-day basis, hopefully, is some cash coming in and some going out. Unless you rob banks, I believe the only thing you can control now and everyday in front of you is how much of your cash goes out. To give what I think is the only answer to your question, it is to save as much as you can everyday for as long as you live, except maybe the last day of life if you can pick that out.

Being 66 and having quit working at 51, I've had a lot of time to reflect on my life. I don't regret today not having money that I clearly in retrospect pissed away, but that I pissed it away weighs on my conscience today. I was never extravagant compared to a lot of people I knew; even though compared to them, I was frugal, I still pissed away a lot of money.

I've never been a person who had dreams about accomplishing some certain standard of living which without achieving I would be disappointed, thus I have never been disappointed with whatever for the moment was my station in life. It only occurred to me at age 62 after losing 2\3 of my net worth that I and my wife seriously needed to differentiate things that we need versus those that we might want. So you might seriously question any advice coming from such a slow learner.

Look right now at how much stuff (my favorite billboard ever, which showed just how fucked up America is, was one that stated "Go to the mall and buy stuff.") you own but do not use, or use infrequently enough to make ownership questionable. All this shit of owning "stuff" began to dawn on me at age 53 when I moved out of a three bedroom condo into one with one bedroom. The amount "stuff" I donated just to rid myself of it was truly obscene.

I believe if you can control your life to spend your earning on things you need versus a lot of stuff you might at any moment want and save the rest, then whenever, if ever, you wish to quit working you will have the most money you could possibly have. That assumes you don't lose all that you did not spend through reckless investment. What you have then is what will determine how you will be able to live without working or whether you will not be able to live without working. Good luck.

GRG55
12-04-07, 02:33 AM
Bruce, I think you can make all the assumptions with which you or anyone else can come up, and the problem is that they are all ASSUMPTIONS, none of which will you ever control.

What you experience on a day-to-day basis, hopefully, is some cash coming in and some going out. Unless you rob banks, I believe the only thing you can control now and everyday in front of you is how much of your cash goes out. To give what I think is the only answer to your question, it is to save as much as you can everyday for as long as you live, except maybe the last day of life if you can pick that out.

Being 66 and having quit working at 51, I've had a lot of time to reflect on my life. I don't regret today not having money that I clearly in retrospect pissed away, but that I pissed it away weighs on my conscience today. I was never extravagant compared to a lot of people I knew; even though compared to them, I was frugal, I still pissed away a lot of money.

I've never been a person who had dreams about accomplishing some certain standard of living which without achieving I would be disappointed, thus I have never been disappointed with whatever for the moment was my station in life. It only occurred to me at age 62 after losing 2\3 of my net worth that I and my wife seriously needed to differentiate things that we need versus those that we might want. So you might seriously question any advice coming from such a slow learner.

Look right now at how much stuff (my favorite billboard ever, which showed just how fucked up America is, was one that stated "Go to the mall and buy stuff.") you own but do not use, or use infrequently enough to make ownership questionable. All this shit of owning "stuff" began to dawn on me at age 53 when I moved out of a three bedroom condo into one with one bedroom. The amount "stuff" I donated just to rid myself of it was truly obscene.

I believe if you can control your life to spend your earning on things you need versus a lot of stuff you might at any moment want and save the rest, then whenever, if ever, you wish to quit working you will have the most money you could possibly have. That assumes you don't lose all that you did not spend through reckless investment. What you have then is what will determine how you will be able to live without working or whether you will not be able to live without working. Good luck.

brucec42: I second Jim's very good advice fully, because although I am a bit younger than him, my own experience is quite similar.

My wife and I have too much "stuff" (she disagrees), but when I look around at our friends and co-workers we are amateurs at consumption. I continue to marvel at the ability of our societies to consume, consume, consume. We accumulate "stuff", and then find we need a bigger house so we have some place to put all that "stuff". Then we put in alarm systems and whatnot because...well...somebody might break in and steal all our "stuff". What a treadmill. It's not about what you earn; it's all about what you spend.

FWIW, after the experience of the 1970's I am constantly wary about inflation and how it can ravage one's savings. I don't try to forecast long range inflation. I just have a constant (single digit) real return target for my investments, and try to achieve that above whatever the prevailing inflation rate is each year. IMO people who think they can achieve constant double-digit returns every year, without excessive risk, are trying to fight history. Some nimble and talented traders can do it, but they are a definite minority.

If you are young you should check out Richard Russell's advice about compounding. I have been trying to teach this to my nieces and nephews, with varying success. Time is an extraordinarily powerful way to generate outsize returns (that is what pension funds and the university endowments do), but it takes a certain temperament and patience that is not encouraged by the pundits and noisemakers in the financial media today.

EJ and others on this site correctly point to the significant latent inflationary pressures, left over from the last cycle, in the economy. As you point out, in some sectors there are significant deflationary pressures primarily from global overcapacity - autos, memory chips, TVs, etc. Navigating this paradox in the years to come will be the challenge. Good luck

brucec42
12-04-07, 07:27 PM
Thanks all for the helpful link and advice and comments. I am also very conscious of the "stuff" out there calling for our money and just how little of it really changes your life in any meaningful way.

My experience of having had to move 7 times in 4 years ( two homes bought/sold for nice profits, plus temporary rentals along the way) made me realize that while I didn't have a lot of stuff compared to most, I still had bought many things that left me scratching my head later as to why. Many of them went into a dumpster. I gradually culled my possessions down, mainly because to save money I was physically moving it all myself and was sick of boxing/unboxing the stuff! Still, it's easy to accumulate too much. I have found that making a clean break with "social expectations" out there will do wonders. You no longer feel the need to keep up or prove something via your spending. I pity the fashion slaves out there who can't be happy w/o the right suit or car or whatever.

Today I buy virtually nothing that isn't functional, or really fun, or for substantial convenience, meaning I don't buy what I would call "wealth display" items like art, stylish "decor" items, expensive clothing, huge TVs, fancy cell phones, or jewelry, and I spend only minimally on luxuries like restaurant meals or vacations.

I have also found that a life structured to provide adequate free time and flexibility is an incredible money saver. Not having to pay for maids, lawn maintenance, tree services, oil changes, simple mechanical work and maintenance, home maintenance, etc etc really adds up, especially since we all pay for those items with after-tax dollars. Living on a large 2 acre lot, I have calculated that I do the equivilent work of about $12,000 of earnings at our tax rate in "chores" in a typical year. That's money a harried person on the corporate treadmill would have to take out of pocket.

We save about 30% of our gross income, and it would be higher except our living/working arrangement requires two homes in different cities. I just want to know that once I have a set amount in the bank we can do what we want the rest of our lives w/o regard for how much it happens to pay. To me that's the ultimate luxury.