If "inflation" were to be defined differently, is retiring early really possible?

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alibaba123
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If "inflation" were to be defined differently, is retiring early really possible?

Post by alibaba123 »

I've read some opinions stating that inflation should really be measured against the M2 money supply and that 40% of that money was printed in the last year alone. Is this true and if so, is my dream to retire early killed? My figues take into account 7% compounded annual growth and 3% inflation. If we were to measure inflation according to the supply of money in existence, wouldn't it make retiring early impossible? I don't know about you but prices around me seem to increase much higher than 2% even before covid so i think there is some truth to the opinion that we shouldn't be using the standard definition of inflation in our retirement calculations.
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JoeRetire
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Re: If "inflation" were to be defined differently, is retiring early really possible?

Post by JoeRetire »

It doesn't matter how you define inflation. That definition won't change your personal circumstances.

It reminds me of the joke:
Q: If you call a tail a leg, how many legs does a dog have?
A: Four. Calling a tail a leg doesn't make it one.
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Call_Me_Op
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Re: If "inflation" were to be defined differently, is retiring early really possible?

Post by Call_Me_Op »

Why would you change the definition of inflation to something that doesn't matter to you? What's important is how much a dollar can buy in terms of goods and services.
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jebmke
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Re: If "inflation" were to be defined differently, is retiring early really possible?

Post by jebmke »

I suppose it might affect future outcomes if it changed the metric used for COLA adjustments or other adjustments to inflation-adjusted items like Tips.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
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alibaba123
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Re: If "inflation" were to be defined differently, is retiring early really possible?

Post by alibaba123 »

Call_Me_Op wrote: Tue Nov 30, 2021 7:12 am Why would you change the definition of inflation to something that doesn't matter to you? What's important is how much a dollar can buy in terms of goods and services.
I guess i am afraid that the annual increase in prices of particular goods and services that i currently buy and will continue to buy 20 years from now would be more than the often-cited 2-3% rate. It seems to be increasing more than that.
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Re: If "inflation" were to be defined differently, is retiring early really possible?

Post by jebmke »

alibaba123 wrote: Tue Nov 30, 2021 7:30 am
Call_Me_Op wrote: Tue Nov 30, 2021 7:12 am Why would you change the definition of inflation to something that doesn't matter to you? What's important is how much a dollar can buy in terms of goods and services.
I guess i am afraid that the annual increase in prices of particular goods and services that i currently buy and will continue to buy 20 years from now would be more than the often-cited 2-3% rate. It seems to be increasing more than that.
changing the definition will do nothing to solve that problem
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
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alibaba123
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Re: If "inflation" were to be defined differently, is retiring early really possible?

Post by alibaba123 »

jebmke wrote: Tue Nov 30, 2021 7:49 am
alibaba123 wrote: Tue Nov 30, 2021 7:30 am
Call_Me_Op wrote: Tue Nov 30, 2021 7:12 am Why would you change the definition of inflation to something that doesn't matter to you? What's important is how much a dollar can buy in terms of goods and services.
I guess i am afraid that the annual increase in prices of particular goods and services that i currently buy and will continue to buy 20 years from now would be more than the often-cited 2-3% rate. It seems to be increasing more than that.
changing the definition will do nothing to solve that problem
I guess i have trouble wrapping my head around this. If there are a 100 people on earth, and the total money supply is 100 million, and each person has a million dollars, and the government prints another 100 million, how can i seriously say my original million dollars is now worth 0.98 million?
fortunefavored
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Re: If "inflation" were to be defined differently, is retiring early really possible?

Post by fortunefavored »

alibaba123 wrote: Tue Nov 30, 2021 7:30 am It seems to be increasing more than that.
Is it though? Have you been tracking every dollar of your spending? The only thing that matters is your personal inflation.

Even at a headline level, if you exclude cars, housing and college.. it has barely budged over the past 2 to 3 years. We had a huge plunge at the start of covid, so headline YoY numbers are all screwy. Smooth it out.. and you're right in your 2-3% range. Which yes, is still higher than it has been in the recent 1 or 2 decades. I think we've all been a little spoiled by very low inflation, so even 2 to 3% showing up is a shock.

I'm assuming as a retired person you won't be buying a lot of housing, college or cars (the latter except by choice.)

Really the only "run-away" inflation has been medical care. And that isn't new.
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JoMoney
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Re: If "inflation" were to be defined differently, is retiring early really possible?

Post by JoMoney »

I think it's interesting to look at the "Velocity of M2 Money"
https://fred.stlouisfed.org/series/M2V
Yes, the quantity of M2 money has gone way up, but use of that money (relative to the supply) is way down. Massive amounts of it are sitting on the books of banks, the Fed, other long-term investments, and not out circulating in the economy.

In light of what OP said though, I do think it's interesting to consider that the Fed has a mandate to maximize employment, what does that mean for someone wanting to stop working early if the Fed is actively working against their individual objective :shock:
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Tamalak
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Re: If "inflation" were to be defined differently, is retiring early really possible?

Post by Tamalak »

alibaba123 wrote: Tue Nov 30, 2021 7:55 am
jebmke wrote: Tue Nov 30, 2021 7:49 am
alibaba123 wrote: Tue Nov 30, 2021 7:30 am
Call_Me_Op wrote: Tue Nov 30, 2021 7:12 am Why would you change the definition of inflation to something that doesn't matter to you? What's important is how much a dollar can buy in terms of goods and services.
I guess i am afraid that the annual increase in prices of particular goods and services that i currently buy and will continue to buy 20 years from now would be more than the often-cited 2-3% rate. It seems to be increasing more than that.
changing the definition will do nothing to solve that problem
I guess i have trouble wrapping my head around this. If there are a 100 people on earth, and the total money supply is 100 million, and each person has a million dollars, and the government prints another 100 million, how can i seriously say my original million dollars is now worth 0.98 million?
If that new 100 million doesn't go anywhere or do anything, it might as well not exist as far as your buying power is concerned.

Inflation is caused by velocity x mass. A dollar moving twice is the same as two dollars moving once.
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alibaba123
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Re: If "inflation" were to be defined differently, is retiring early really possible?

Post by alibaba123 »

Tamalak wrote: Tue Nov 30, 2021 8:05 am
alibaba123 wrote: Tue Nov 30, 2021 7:55 am
jebmke wrote: Tue Nov 30, 2021 7:49 am
alibaba123 wrote: Tue Nov 30, 2021 7:30 am
Call_Me_Op wrote: Tue Nov 30, 2021 7:12 am Why would you change the definition of inflation to something that doesn't matter to you? What's important is how much a dollar can buy in terms of goods and services.
I guess i am afraid that the annual increase in prices of particular goods and services that i currently buy and will continue to buy 20 years from now would be more than the often-cited 2-3% rate. It seems to be increasing more than that.
changing the definition will do nothing to solve that problem
I guess i have trouble wrapping my head around this. If there are a 100 people on earth, and the total money supply is 100 million, and each person has a million dollars, and the government prints another 100 million, how can i seriously say my original million dollars is now worth 0.98 million?
If that new 100 million doesn't go anywhere or do anything, it might as well not exist as far as your buying power is concerned.

Inflation is caused by velocity x mass. A dollar moving twice is the same as two dollars moving once.
Ok but in light of the Fed having printed 40% of the total money supply last year alone, i have a hard time believing we will only be seeing 2-3% or even 5-6% inflation in the years to come. It's hard for me to imagine 99% of that money not going anywhere or doing anything. So how is it possible for them to keep to their 2% inflation target?
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Re: If "inflation" were to be defined differently, is retiring early really possible?

Post by Young Boglehead »

What is your personal rate of inflation and your personal rate of return. If the latter minus the former is above the reasonable 5-7% inflation adjusted returns you expect in your financial plan are you not ahead? And if you have stayed the course you should be doing well.

Don’t miss the forest for the trees. Amazingly I never see this discussion amongst ALL the talk of inflation. Overall should investors not be exceedingly happy about where we are with returns - inflation, all that really matters, over the last decade and even last 2 years?
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JoMoney
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Re: If "inflation" were to be defined differently, is retiring early really possible?

Post by JoMoney »

alibaba123 wrote: Tue Nov 30, 2021 8:12 am.... So how is it possible for them to keep to their 2% inflation target?
¯\_(ツ)_/¯
FWIW, for the past 15 year period, October 2006 through October 2021, inflation has been 2.1% annualized
https://www.bls.gov/data/inflation_calculator.htm
The money supply more than doubled over that period.

The Fed does have tools expected to drain money out of the system and to try and combat high inflation.
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Re: If "inflation" were to be defined differently, is retiring early really possible?

Post by alex_686 »

alibaba123 wrote: Tue Nov 30, 2021 8:12 am Ok but in light of the Fed having printed 40% of the total money supply last year alone, i have a hard time believing we will only be seeing 2-3% or even 5-6% inflation in the years to come.
But the government did not print 40% of the money supply last year. You are referencing M2. i.e. high-power hard currency.

Over 90% of the money is created by banks by (simplifying here) fractional reserve banking. All that money the Fed has been pouring into the banks have been staying in the banks. The banks have been frantically shoring up their balance sheets during that time of chaos.
alibaba123 wrote: Tue Nov 30, 2021 8:12 am It's hard for me to imagine 99% of that money not going anywhere or doing anything. So how is it possible for them to keep to their 2% inflation target?
You may not have noticed by the Fed has been granting reserve waivers to banks becuase they are so stuffed with cash. Banks really don't know what to do with all of their cash in their vaults. It is not getting out into the economy.
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Re: If "inflation" were to be defined differently, is retiring early really possible?

Post by Valuethinker »

JoMoney wrote: Tue Nov 30, 2021 8:28 am
alibaba123 wrote: Tue Nov 30, 2021 8:12 am.... So how is it possible for them to keep to their 2% inflation target?
¯\_(ツ)_/¯
FWIW, for the past 15 year period, October 2006 through October 2021, inflation has been 2.1% annualized
https://www.bls.gov/data/inflation_calculator.htm
The money supply more than doubled over that period.

The Fed does have tools expected to drain money out of the system and to try and combat high inflation.
The missing variable is (you know this - but the other poster may not) is of course Velocity of Money.

GDP = amount of money spent *over time*.

If it just sits in bank vaults, increasing the money supply doesn't stimulate the economy.

And on the price level, it's necessary to consider the *expected* future money supply.

If the market believes the Central Bank will act to tighten in the future, to control inflation, it is reasonable to assume that inflation will not accelerate out of control. The increase in the money supply is temporary, and can be reversed -- for example, by ending Quantitative Easing.

Japan is instructive. Despite efforts for decades, literally, the Bank of Japan has failed to stimulate inflation above 2% pa. Struggled very hard to even hit that target.

Increases in prices, for example gasoline, simply lead Japanese consumers to cut their spending on other items. Relative prices change, but absolute ones don't change by as much.

A drop in the price of used motor vehicles would have a big impact on US CPI - the rise in prices (I have this mental image it was +46% year-on-year?) was so dramatic. So if car companies could resolve their chip shortages, and US ports could import more, that would be a deflationary factor right there.
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Re: If "inflation" were to be defined differently, is retiring early really possible?

Post by delamer »

You think that inflation will run higher over the course of your retirement than the 2%-3% that you originally projected?

And you think that the nominal return on your investments in retirement will not change?

Then, yes, you’ll need to save more money to retire than you originally thought.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
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Re: If "inflation" were to be defined differently, is retiring early really possible?

Post by willthrill81 »

alibaba123 wrote: Tue Nov 30, 2021 7:55 am
jebmke wrote: Tue Nov 30, 2021 7:49 am
alibaba123 wrote: Tue Nov 30, 2021 7:30 am
Call_Me_Op wrote: Tue Nov 30, 2021 7:12 am Why would you change the definition of inflation to something that doesn't matter to you? What's important is how much a dollar can buy in terms of goods and services.
I guess i am afraid that the annual increase in prices of particular goods and services that i currently buy and will continue to buy 20 years from now would be more than the often-cited 2-3% rate. It seems to be increasing more than that.
changing the definition will do nothing to solve that problem
I guess i have trouble wrapping my head around this. If there are a 100 people on earth, and the total money supply is 100 million, and each person has a million dollars, and the government prints another 100 million, how can i seriously say my original million dollars is now worth 0.98 million?
Read this thread for an explanation.
The Sensible Steward
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