Inflation, do you really have to out earn it?

[AlabamaMustang]

You hear it all the time. Your investments must have gains more than inflation or your losing money. Really?
Let's say you have 500k and inflation is 7%. That means you would need to make 35k to cover inflation.
So you really had an increase in your cost of 35k last year? I think not.
It would seem that you should base the amount on your expenses that are affected by said inflation. Like gas, food, entertainment, etc.. So let's say those cost are 100k. That's just 7k of inflation for the year. A long way from 35k.
Even at 7k. Did your cost really go up that much last year? So just be careful thinking that you really need to out pace the inflated inflation percentage with your investments!

[KlangFool]

OP,

Yes and no. The answer is dependent on

A) Your portfolio size as a multiple of your annual expense.

B) What is your personal inflation rate? How much your annual expense actually increase?

Your post mention (B). There is (A) too.

KlangFool

[Wiggums]

Inflation increases the price of groceries (for example) or decreases the value of the dollar in our wallet. Inflation affects all areas of the economy and over time, it can take a bite out of your investment returns as well.

[Jags4186]

You hear it all the time. Your investments must have gains more than inflation or your losing money. Really?
Let's say you have 500k and inflation is 7%. That means you would need to make 35k to cover inflation.
So you really had an increase in your cost of 35k last year? I think not.
It would seem that you should base the amount on your expenses that are affected by said inflation. Like gas, food, entertainment, etc.. So let's say those cost are 100k. That's just 7k of inflation for the year. A long way from 35k.
Even at 7k. Did your cost really go up that much last year? So just be careful thinking that you really need to out pace the inflated inflation percentage with your investments!

I think you’re missing a few things. If you have $500k and inflation is 7% that means the following year you’d need $535k to buy the same amount of stuff $500k bought the year prior. If you’re only spending $50k a year though you only need an extra $3500 to buy the same amount of stuff. So if your $500k grows to $520k you’re covered.

What happens is that over time if your portfolio consistently underperforms inflation your withdrawals can become a very large portion of your portfolio. But that’s okay as long as you don’t run out of money before you die. If you’re 95 years old it probably doesn’t matter if you withdraw 10% from your investments. But if you’re 68 and in good health 10% will deplete your portfolio quickly.

This is why it’s important to get the big parts of inflation under control — if you own your house you have relatively fixed housing expense. You don’t experience the housing inflation baked into the government reported inflation #.

[Weathering]

Month to month inflation right now is running near zero right now. So, most everyone underperformed against inflation in 2022, but now we are outperforming inflation. Look at long term treasury bonds. They show the expected inflation over the long term is lower than near-term inflation. Therefore, keep being focused on the long term and you have a very high percentage chance at outperforming inflation. Even though, in short term bursts, inflation may outperform.

Every month, for the past five months, I’ve outperformed inflation - I suspect you have too. I view this recent performance as a chance to climb out of the hole of underperforming inflation in early-to-mid 2022.

[Triple digit golfer]

The often-mentioned notion of beating inflation and a 0% real return should mean to beat one's own personal inflation rate.

If you match the CPI but your personal rate of inflation is lower than the CPI, you've got a positive real return.

[Grogs]

You hear it all the time. Your investments must have gains more than inflation or your losing money. Really?
Let's say you have 500k and inflation is 7%. That means you would need to make 35k to cover inflation.
So you really had an increase in your cost of 35k last year? I think not.
It would seem that you should base the amount on your expenses that are affected by said inflation. Like gas, food, entertainment, etc.. So let's say those cost are 100k. That's just 7k of inflation for the year. A long way from 35k.
Even at 7k. Did your cost really go up that much last year? So just be careful thinking that you really need to out pace the inflated inflation percentage with your investments!

Before inflation, your $500k was enough to cover 5 years of expenses, $500k/$100k = 5X. Now with 7% inflation, your expenses are $107k. In order to still have 5 years of expenses, your investments have to rise to $535k = 5X expenses @ $107k/year. So you really are losing in terms of spending power if your investments underperform inflation.

It's a subtle thing, really. If inflation is 7% and your investments gained 6%, you would probably be pretty happy just because your balance went up a lot. On the other hand, if we had deflation and expenses dropped -5%, you would probably be upset if your investments dropped -1% (i.e., a nominal loss, but a 4% real gain). It's just how our brains are wired to perceive things: number go up = good.

[ScubaHogg]

Setting aside made up terms like “personal inflation rate”, that $500K can now only buy 93% as much stuff as it could last year (to a first approximation). So yes, unless you don’t care about losing purchasing power you should hope to at least keep up with inflation.

As a thought experiment, imagine the CPI was increasing at 100% a year and you weren’t at all concerned with keeping up with inflation. How useful would that $500K be to you in a few years?

Many books have been written about the events in Weimar Germany between mid-1921 and early 1924, when, for example, the cost of a loaf of bread was measured in millions of marks, then billions of marks, then trillions of marks

-William Bernstein, Rational expectations

[Da5id]

You hear it all the time. Your investments must have gains more than inflation or your losing money. Really?
Let's say you have 500k and inflation is 7%. That means you would need to make 35k to cover inflation.
So you really had an increase in your cost of 35k last year? I think not.
It would seem that you should base the amount on your expenses that are affected by said inflation. Like gas, food, entertainment, etc.. So let's say those cost are 100k. That's just 7k of inflation for the year. A long way from 35k.
Even at 7k. Did your cost really go up that much last year? So just be careful thinking that you really need to out pace the inflated inflation percentage with your investments!

Before inflation, your $500k was enough to cover 5 years of expenses, $500k/$100k = 5X. Now with 7% inflation, your expenses are $107k. In order to still have 5 years of expenses, your investments have to rise to $535k = 5X expenses @ $107k/year. So you really are losing in terms of spending power if your investments underperform inflation.

It's a subtle thing, really. If inflation is 7% and your investments gained 6%, you would probably be pretty happy just because your balance went up a lot. On the other hand, if we had deflation and expenses dropped -5%, you would probably be upset if your investments dropped -1% (i.e., a nominal loss, but a 4% real gain). It's just how our brains are wired to perceive things: number go up = good.

I think you may be missing part of his point. Inflation rate can be personal. e.g. I have a fully paid off house. I'm not exposed to housing cost inflation (unless you are dinging me for imputed rent) in the same way a renter whose rent may increase annually at a market rate might be. Someone else may have a really generous health plan with premiums mostly or entirely paid by their employer, they aren't exposed to inflation in the way I am with a Health Connector plan.

[JayB]

For decades, the financial press has been telling readers that their investments MUST keep pace with or beat inflation. I have interpreted this crude, often unquestioned, and almost universal advice as trying to pressure or guilt investors into staying heavily invested in equities (a stance which benefits publications' mutual fund advertisers), even when an investor's portfolio could sustain significant below-inflation returns throughout their lifetime. If a portfolio is large enough, there is no monetary imperative to keep pace with or beat inflation; it becomes a psychological thing reflecting fear of losing purchasing power, even when what all that purchasing power would be ultimately used for cannot be specified.

[sc9182]

If you have house with fixed-mortgage (or already paid-off), car(s) already-bought pre-pandemic (ie., not paying pandemic prices), decently sized Solar+EV, with employer/Medicare paid (mostly) health-insurance., then your inflation is prolly limited to Food/Groceries and some travel/entertainment.

Then again - if you recently graduated and starting off life with, trying to make purchases/acquire-assets., then your color of glasses would be a bit different. Then again, with past few months of near-zero inflation -- things appear to be stabilizing for good (except Egg-flation)

At the end of the day, your own personal rate/effects of inflation could be lot more "personal" than what headlines scream.

[ScubaHogg]

I think you may be missing part of his point. Inflation rate can be personal. e.g. I have a fully paid off house. I'm not exposed to housing cost inflation (unless you are dinging me for imputed rent) in the same way a renter whose rent may increase annually at a market rate might be. Someone else may have a really generous health plan with premiums mostly or entirely paid by their employer, they aren't exposed to inflation in the way I am with a Health Connector plan.

Prepaying future expenses can be a good way to lock in a cost of living, at least for a time. But even in housing you are still very affected by inflation, just indirectly or on a different time scale.

And my opinion is we should ding you for imputed rent. But that’s me

[SmileyFace]

I am out earning it absolutely. But I am in it for 40+ years in retirment accounts (and 15 to 20 years in college funding accounts) so why would I worry about a single year or 3? Some years I beat inflation by 30% other years I lose - it's the long time period that matters to me.

You quoted "last year". Why does one year matter?

[Da5id]

I think you may be missing part of his point. Inflation rate can be personal. e.g. I have a fully paid off house. I'm not exposed to housing cost inflation (unless you are dinging me for imputed rent) in the same way a renter whose rent may increase annually at a market rate might be. Someone else may have a really generous health plan with premiums mostly or entirely paid by their employer, they aren't exposed to inflation in the way I am with a Health Connector plan.

Prepaying future expenses can be a good way to lock in a cost of living, at least for a time. But even in housing you are still very affected by inflation, just indirectly or on a different time scale.

And my opinion is we should ding you for imputed rent. But that’s me

Fair, I mentioned imputed rent because it is clearly an important concept if one is accounting or choosing between alternatives. But it isn't impacting my actual cash flow in a way that, say, a rent increase does to a renter, grocery prices do for the huge majority of us who don't grow our own food (which I guess has its own imputed costs), or a premium increase do for the various insurances I carry.

[Grogs]

You hear it all the time. Your investments must have gains more than inflation or your losing money. Really?
Let's say you have 500k and inflation is 7%. That means you would need to make 35k to cover inflation.
So you really had an increase in your cost of 35k last year? I think not.
It would seem that you should base the amount on your expenses that are affected by said inflation. Like gas, food, entertainment, etc.. So let's say those cost are 100k. That's just 7k of inflation for the year. A long way from 35k.
Even at 7k. Did your cost really go up that much last year? So just be careful thinking that you really need to out pace the inflated inflation percentage with your investments!

Before inflation, your $500k was enough to cover 5 years of expenses, $500k/$100k = 5X. Now with 7% inflation, your expenses are $107k. In order to still have 5 years of expenses, your investments have to rise to $535k = 5X expenses @ $107k/year. So you really are losing in terms of spending power if your investments underperform inflation.

It's a subtle thing, really. If inflation is 7% and your investments gained 6%, you would probably be pretty happy just because your balance went up a lot. On the other hand, if we had deflation and expenses dropped -5%, you would probably be upset if your investments dropped -1% (i.e., a nominal loss, but a 4% real gain). It's just how our brains are wired to perceive things: number go up = good.

I think you may be missing part of his point. Inflation rate can be personal. e.g. I have a fully paid off house. I'm not exposed to housing cost inflation (unless you are dinging me for imputed rent) in the same way a renter whose rent may increase annually at a market rate might be. Someone else may have a really generous health plan with premiums mostly or entirely paid by their employer, they aren't exposed to inflation in the way I am with a Health Connector plan.

I didn't take OP's post to be about personal rate of inflation because they're comparing $7k to $35k. Look at the part I bolded - that's what I took to be the main point from their post. That's the part I disagree with. I 100% agree that the inflation value that really matters is personal rate of inflation, but that cuts both ways. If CPI is 3% and personal inflation is 10%, then you're losing purchasing power if investments make < 10%.

[iim7V7IM7]

What is interesting is the long term inflation estimate is still fairly moderate based on the US bond market. (Yesterday’s yields)

Maturity (Years)——Treasury Yield (%)——TIPS Yield (%)——Inferred Inflation (%)
5—————————————-3.67%——————1.38%———————-2.29%
10—————————————3.53%——————1.29%———————-2.24%
30—————————————3.62%——————1.46%——————-—2.16%

While above the spoken Fed 2% target looking at 5 year, 10 year and 30 year Treasury Bonds and TIPS I see 2.2% to 2.3%. I know that last fall’s Morningstar forecast used 2.8% but that may have been influenced by yields at the time.

The work of David Blanchett is the most widely cited about retirees having a spending smile in their personal rate of inflation. Spending being high across the first decade due to discretionary spending, decreasing across the second and increasing again in the third decade driven by healthcare and or LTC. One way to potentially address this is to have discretionary funds with a shorter time horizon to allow for spending early on and LTC insurance or reserves + Midicare/MediGap to cover the back end rise.

[8301]

The often-mentioned notion of beating inflation and a 0% real return should mean to beat one's own personal inflation rate.

If you match the CPI but your personal rate of inflation is lower than the CPI, you've got a positive real return.

Things are a little bit more complicated. If the gain is subject to taxes, your return should be somewhat greater than your CPI. It depends on when taxes are assessed.

[neurosphere]

Did your cost really go up that much last year? So just be careful thinking that you really need to out pace the inflated inflation percentage with your investments!

Saying similar things that others have said in another way...

Who cares about last year's inflation and how it affected you? The problem with inflation with respect to retirement investing is the FUTURE.

Do you pay for healthcare?
Need to pay tuition for someone?
Insure your home?

What about internet, cell phones, cable tv, personal services (laundry, maid, lawncare), toiletries, legal fees? Which of these do you pay for now and which will you need in the future?

Don't just think about things you pay for now, you have to account for things you'll need in the future: nursing home or health aids, medical equipment, maintenance or repair on a home you own (or future rent), etc.

The problem with trying to estimate an inflation rate for "YOU" is that YOU have to predict all the things you MAY need between now and when you die. Inflation is not just a "how did inflation affect me this year?" concern with respect to investing.

[secondopinion]

It depends on how much wealth in real terms you want. If it is outperforming inflation, then it can be as large as you want. If not, it can only reach the point where one’s contributions makes up the difference of which the portfolio fell short to inflation.

In short, one is not building wealth if inflation is not being defeated.

[smooth_rough]

Think of it this way, if inflation rate is 7%, and the interest rate on your bank account is earning half that amount, every day you wake up you are poorer. Inflation is like a regressive tax.

[coachd50]

You hear it all the time. Your investments must have gains more than inflation or your losing money. Really?
Let's say you have 500k and inflation is 7%. That means you would need to make 35k to cover inflation.
So you really had an increase in your cost of 35k last year? I think not.
It would seem that you should base the amount on your expenses that are affected by said inflation. Like gas, food, entertainment, etc.. So let's say those cost are 100k. That's just 7k of inflation for the year. A long way from 35k.
Even at 7k. Did your cost really go up that much last year? So just be careful thinking that you really need to out pace the inflated inflation percentage with your investments!

A few points:
I think you are mixing two concepts which kind of muddles the discussion. I am not sure saying that earnings on the total portfolio outpacing the nominal yearly expense increase really supports the general point "do I really need to outpace inflation ". In doing so, you seem to neglect the concept of time and how inflation erodes a portfolios balance (as others have pointed out mathematically) As each years expenses increase, a larger portion of your portfolio will have to be withdrawn to cover it.

But the "good" news is- as other posters have pointed out-, the need is to outpace inflation OVER TIME. Some years unfortunately, inflation will "win" (as probably happened to the vast majority here in 2022- high inflation, negative returns). But as has been mentioned, other years see double digit investment returns and 2% inflation.

Lastly, yes the inflation rate quoted in the media is a very general rate and one's individual rate can vary, sometimes significantly. However, this can go both ways. I have seen posts saying the last month or two have seen near zero or zero inflation. I, on the other hand, have seen several of the products I purchase at the grocery increase well over 50% (not just chicken or eggs).

[Thesaints]

You hear it all the time. Your investments must have gains more than inflation or your losing money. Really?
Let's say you have 500k and inflation is 7%. That means you would need to make 35k to cover inflation.
So you really had an increase in your cost of 35k last year? I think not.

Agree: your cost may have gone up more than 35k, or less. The CPI-U data is a triple average (average change in price of the average consumption of the average urban area family) and nobody is that average.

[Johm221122]

You hear it all the time. Your investments must have gains more than inflation or your losing money. Really?
Let's say you have 500k and inflation is 7%. That means you would need to make 35k to cover inflation.
So you really had an increase in your cost of 35k last year? I think not.

Investing isn't just one year. You must beat inflation Long term (your personal inflation), not every single year or you are loosing value (but that isn't necessarily bad for everyone depending on their goals)

[Marseille07]

You hear it all the time. Your investments must have gains more than inflation or your losing money. Really?
Let's say you have 500k and inflation is 7%. That means you would need to make 35k to cover inflation.
So you really had an increase in your cost of 35k last year? I think not.
It would seem that you should base the amount on your expenses that are affected by said inflation. Like gas, food, entertainment, etc.. So let's say those cost are 100k. That's just 7k of inflation for the year. A long way from 35k.
Even at 7k. Did your cost really go up that much last year? So just be careful thinking that you really need to out pace the inflated inflation percentage with your investments!

I think we have to outearn it, but the hurdle isn't the entire amount of CPI, just on the expenses as you correctly identified.

[smooth_rough]

You are gaslighting yourselves believing inflation doesn't negatively impact you personally if you live frugal lifestyle. Its actually the wealthy who are better able to weather the impact of inflation.

[Nutmeg]

Inflation affects even the person who owns a home without a mortgage loan if he or she ever hopes to move again (particularly without selling the current home first). Inflation in home prices in such a situation means:

1. The amount of cash needed for a 20 percent down payment for the new house will increase (and if obtaining the additional funds results in a taxable event, taxes will increase);
2. The dollar amount for the selling commission when the current house is sold will increase;
3. The new mortgage (to be paid off when the current house is sold) might have to be a jumbo mortgage, with stricter underwriting requirements;
4. Closing costs will increase.

[Johm221122]

You are gaslighting yourselves believing inflation doesn't negatively impact you personally if you live frugal lifestyle. Its actually the wealthy who are better able to weather the impact of inflation.

I don't think anyone thinks inflation doesn't negatively affect them. It's the amount it personally negatively affects us.

How much you spend and what you spend it on varies wildly from person to person. I'm extremely far from wealthy but inflation doesn't have much of an effect on my budget or savings rate.

When companies or products raise prices I change my spending patterns in a large percentage of my purchases. I'm very price conscious and not very loyal to companies or products

[smooth_rough]

You are gaslighting yourselves believing inflation doesn't negatively impact you personally if you live frugal lifestyle. Its actually the wealthy who are better able to weather the impact of inflation.

I don't think anyone thinks inflation doesn't negatively affect them. It's the amount it personally negatively affects us.

How much you spend and what you spend it on varies wildly from person to person. I'm extremely far from wealthy but inflation doesn't have much of an effect on my budget or savings rate.

When companies or products raise prices I change my spending patterns in a large percentage of my purchases. I'm very price conscious and not very loyal to companies or products

Inflation goes ways beyond consumer staples and clipping coupons. That's tip of iceberg, sounds like you might have difficulty understanding what you can't easily see.

[Johm221122]

You are gaslighting yourselves believing inflation doesn't negatively impact you personally if you live frugal lifestyle. Its actually the wealthy who are better able to weather the impact of inflation.

I don't think anyone thinks inflation doesn't negatively affect them. It's the amount it personally negatively affects us.

How much you spend and what you spend it on varies wildly from person to person. I'm extremely far from wealthy but inflation doesn't have much of an effect on my budget or savings rate.

When companies or products raise prices I change my spending patterns in a large percentage of my purchases. I'm very price conscious and not very loyal to companies or products

Inflation goes ways beyond consumer staples and clipping coupons. That's tip of iceberg, sounds like you might have difficulty understanding what you can't easily see.

I see my spending every month and my income. It tells me that my savings rate is still the same.

[smooth_rough]

You are gaslighting yourselves believing inflation doesn't negatively impact you personally if you live frugal lifestyle. Its actually the wealthy who are better able to weather the impact of inflation.

I don't think anyone thinks inflation doesn't negatively affect them. It's the amount it personally negatively affects us.

How much you spend and what you spend it on varies wildly from person to person. I'm extremely far from wealthy but inflation doesn't have much of an effect on my budget or savings rate.

When companies or products raise prices I change my spending patterns in a large percentage of my purchases. I'm very price conscious and not very loyal to companies or products

Inflation goes ways beyond consumer staples and clipping coupons. That's tip of iceberg, sounds like you might have difficulty understanding what you can't easily see.

I see my spending every month and my income. It tells me that my savings rate is still the same.

There's no way to compensate for inflation over time by spending less. That's a melting ice cube. Good luck with that.

[Johm221122]

You are gaslighting yourselves believing inflation doesn't negatively impact you personally if you live frugal lifestyle. Its actually the wealthy who are better able to weather the impact of inflation.

I don't think anyone thinks inflation doesn't negatively affect them. It's the amount it personally negatively affects us.

How much you spend and what you spend it on varies wildly from person to person. I'm extremely far from wealthy but inflation doesn't have much of an effect on my budget or savings rate.

When companies or products raise prices I change my spending patterns in a large percentage of my purchases. I'm very price conscious and not very loyal to companies or products

Inflation goes ways beyond consumer staples and clipping coupons. That's tip of iceberg, sounds like you might have difficulty understanding what you can't easily see.

I see my spending every month and my income. It tells me that my savings rate is still the same.

There's no way to compensate for inflation over time by spending less. That's a melting ice cube. Good luck with that.

But I also earn more. My paycheck grows and hopefully my investments grow(also my expected social security grows).

Inflation effects a lot more than your spending. There are winners and losers with inflation. I know many people who make more now than they ever have because of there companies upping pay in this environment

[PotashDoggerd]

The often-mentioned notion of beating inflation and a 0% real return should mean to beat one's own personal inflation rate.

If you match the CPI but your personal rate of inflation is lower than the CPI, you've got a positive real return.

That's nonsense. Inflation affects the real value of all of your assets. You can have a personal inflation rate of 0%, spend 0% of your assets, and all of your assets are still worth 7% less at the end of the year (than they would otherwise be in a zero inflation environment) if the official inflation rate for the economy was 7% that year.

[PotashDoggerd]

You are gaslighting yourselves believing inflation doesn't negatively impact you personally if you live frugal lifestyle. Its actually the wealthy who are better able to weather the impact of inflation.

I don't think anyone thinks inflation doesn't negatively affect them. It's the amount it personally negatively affects us.

How much you spend and what you spend it on varies wildly from person to person. I'm extremely far from wealthy but inflation doesn't have much of an effect on my budget or savings rate.

When companies or products raise prices I change my spending patterns in a large percentage of my purchases. I'm very price conscious and not very loyal to companies or products

Inflation has the same effect on everyone in terms of its negative impact on the real value of all your assets.

It doesn't matter what your "personal inflation rate" is--there is actually no such thing. Or rather, it's a form of cognitive bias or mental accounting to believe that something called "personal inflation rate" is even relevant.

How much of one's available assets an individual chooses to deplete for consumption purposes is infinitely variable and a matter of personal preference and/or necessity.

It doesn't change the "inflation rate" to anything less (or more) simply because an individual chooses to consume less in real dollars, or via substitution of goods and services that are different from the average market basket used to compute official inflation stats, one's personal expenditures for that year might be somewhat less impacted by that year's increase in inflation than someone else's market basket.

In fact, the very reason you are making those choices to select a different market basket, and proclaim that your personal inflation rate is "lower," IS a direct behavioral consequence of economy-wide inflation. You are at least conceptually or cognitively, limiting your available choices of particular goods and services, or quantities thereof, because of economy-wide inflation, which directly impacts not only the cost of your market basket of goods and services; but the real quantity of assets you have to service that consumption.

[tibbitts]

You hear it all the time. Your investments must have gains more than inflation or your losing money. Really?
Let's say you have 500k and inflation is 7%. That means you would need to make 35k to cover inflation.
So you really had an increase in your cost of 35k last year? I think not.
It would seem that you should base the amount on your expenses that are affected by said inflation. Like gas, food, entertainment, etc.. So let's say those cost are 100k. That's just 7k of inflation for the year. A long way from 35k.
Even at 7k. Did your cost really go up that much last year? So just be careful thinking that you really need to out pace the inflated inflation percentage with your investments!

Your only valid point is that a personal inflation rate is what counts. Sometimes you hear things all the time because they're correct.

[Triple digit golfer]

The often-mentioned notion of beating inflation and a 0% real return should mean to beat one's own personal inflation rate.

If you match the CPI but your personal rate of inflation is lower than the CPI, you've got a positive real return.

That's nonsense. Inflation affects the real value of all of your assets. You can have a personal inflation rate of 0%, spend 0% of your assets, and all of your assets are still worth 7% less at the end of the year (than they would otherwise be in a zero inflation environment) if the official inflation rate for the economy was 7% that year.

That's nonsense. I'm talking buying power.

[PotashDoggerd]

You hear it all the time. Your investments must have gains more than inflation or your losing money. Really?
Let's say you have 500k and inflation is 7%. That means you would need to make 35k to cover inflation.
So you really had an increase in your cost of 35k last year? I think not.
It would seem that you should base the amount on your expenses that are affected by said inflation. Like gas, food, entertainment, etc.. So let's say those cost are 100k. That's just 7k of inflation for the year. A long way from 35k.
Even at 7k. Did your cost really go up that much last year? So just be careful thinking that you really need to out pace the inflated inflation percentage with your investments!

Your only valid point is that a personal inflation rate is what counts. Sometimes you hear things all the time because they're correct.

No, personal inflation rate doesn't matter at all. It's illusory. I can change my "personal inflation rate" arbitrarily by simply selecting different quantities and types of goods and services to consume. But doing so doesn't change, at all, how inflation impacts my assets. In fact, the economy wide inflation rate out of necessity automatically incorporates these sorts of individual consumption choices/preferences.

If steak doubles in price In January, overall people will stop buying so much steak, and start buying more chicken (for example), which let's say is much cheaper at the beginning of the year. The amount of steak bought will tend to decline, and based on supply and demand, the price of steak will tend to decline; the amount of chicken bought will tend to increase, and the price of chicken will tend to increase, until a new equilibrium is reached.

So every individual's preferences and choices, and changes in those preferences and choices as a result of inflation re: their consumption are already part of the official inflation rate.

If steak doubles, it doesn't matter whether or not you personally choose to eat steak. If you want to buy steak, it will cost you double too. If you are choosing to buy chicken instead of steak because steak doubled, then of course the official inflation rate impacted you--it limited your ability to spend your available assets on a prior consumption item, steak (assuming you used to buy steak and had to stop because when it doubled, it no longer could be fit into your personal budget.)

And the argument is valid even if you don't like steak and would never buy steak at any price. Your MONEY can only buy half as much steak.

Same applies if the overall inflation rate is 7% for the entire economy. Your money only buys 93% of what it bought the year before, and it doesn't matter what you specifically choose to buy, even if you buy nothing at all.

[PotashDoggerd]

The often-mentioned notion of beating inflation and a 0% real return should mean to beat one's own personal inflation rate.

If you match the CPI but your personal rate of inflation is lower than the CPI, you've got a positive real return.

That's nonsense. Inflation affects the real value of all of your assets. You can have a personal inflation rate of 0%, spend 0% of your assets, and all of your assets are still worth 7% less at the end of the year (than they would otherwise be in a zero inflation environment) if the official inflation rate for the economy was 7% that year.

That's nonsense. I'm talking buying power.

So you actually believe you have more "buying power" after a 7% inflation year then you had at the beginning of the year? WUT.

[Johm221122]

You are gaslighting yourselves believing inflation doesn't negatively impact you personally if you live frugal lifestyle. Its actually the wealthy who are better able to weather the impact of inflation.

I don't think anyone thinks inflation doesn't negatively affect them. It's the amount it personally negatively affects us.

How much you spend and what you spend it on varies wildly from person to person. I'm extremely far from wealthy but inflation doesn't have much of an effect on my budget or savings rate.

When companies or products raise prices I change my spending patterns in a large percentage of my purchases. I'm very price conscious and not very loyal to companies or products

Inflation has the same effect on everyone in terms of its negative impact on the real value of all your assets.

It doesn't matter what your "personal inflation rate" is--there is actually no such thing. Or rather, it's a form of cognitive bias or mental accounting to believe that something called "personal inflation rate" is even relevant.

How much of one's available assets an individual chooses to deplete for consumption purposes is infinitely variable and a matter of personal preference and/or necessity.

It doesn't change the "inflation rate" to anything less (or more) simply because an individual chooses to consume less in real dollars, or via substitution of goods and services that are different from the average market basket used to compute official inflation stats, one's personal expenditures for that year might be somewhat less impacted by that year's increase in inflation than someone else's market basket.

In fact, the very reason you are making those choices to select a different market basket, and proclaim that your personal inflation rate is "lower," IS a direct behavioral consequence of economy-wide inflation. You are at least conceptually or cognitively, limiting your available choices of particular goods and services, or quantities thereof, because of economy-wide inflation, which directly impacts not only the cost of your market basket of goods and services; but the real quantity of assets you have to service that consumption.

But wouldn't your assets such as real estate and stocks go up in value eventually (as in on average, there will be winners and loosers with investments)?

Yes I'm changing my basket of goods but that doesn't necessarily mean it's a bad thing. Yes I'm limiting the amount of times I eat out for instance but I eat way more healthy at home for instance.

There are winners and loosers with inflation. My granddaughter graduated high school last year and straight out of highschool got $18 an hour with no specific skill. Just a couple of years ago she would have been lucky to get $10 in my city. My income was 10% higher than a year ago and two of my coworkers got large raises because they put there two week notice in

[tibbitts]

You hear it all the time. Your investments must have gains more than inflation or your losing money. Really?
Let's say you have 500k and inflation is 7%. That means you would need to make 35k to cover inflation.
So you really had an increase in your cost of 35k last year? I think not.
It would seem that you should base the amount on your expenses that are affected by said inflation. Like gas, food, entertainment, etc.. So let's say those cost are 100k. That's just 7k of inflation for the year. A long way from 35k.
Even at 7k. Did your cost really go up that much last year? So just be careful thinking that you really need to out pace the inflated inflation percentage with your investments!

Your only valid point is that a personal inflation rate is what counts. Sometimes you hear things all the time because they're correct.

No, personal inflation rate doesn't matter at all. It's illusory. I can change my "personal inflation rate" arbitrarily by simply selecting different quantities and types of goods and services to consume. But doing so doesn't change, at all, how inflation impacts my assets. In fact, the economy wide inflation rate out of necessity automatically incorporates these sorts of individual consumption choices/preferences.

If steak doubles in price In January, overall people will stop buying so much steak, and start buying more chicken (for example), which let's say is much cheaper at the beginning of the year. The amount of steak bought will tend to decline, and based on supply and demand, the price of steak will tend to decline; the amount of chicken bought will tend to increase, and the price of chicken will tend to increase, until a new equilibrium is reached.

So every individual's preferences and choices, and changes in those preferences and choices as a result of inflation re: their consumption are already part of the official inflation rate.

If steak doubles, it doesn't matter whether or not you personally choose to eat steak. If you want to buy steak, it will cost you double too. If you are choosing to buy chicken instead of steak because steak doubled, then of course the official inflation rate impacted you--it limited your ability to spend your available assets on a prior consumption item, steak (assuming you used to buy steak and had to stop because when it doubled, it no longer could be fit into your personal budget.)

And the argument is valid even if you don't like steak and would never buy steak at any price. Your MONEY can only buy half as much steak.

Same applies if the overall inflation rate is 7% for the entire economy. Your money only buys 93% of what it bought the year before, and it doesn't matter what you specifically choose to buy, even if you buy nothing at all.

But that would imply there there was one agreed-upon "overall" inflation rate, rather than the 1,753 varieties of CPI-whatever.

[suemarkp]

Most of these planning factors are based on averages. Deferring social security until 70 is actuarially the same versus taking it at 62. But if you defer to 70 and die at 69 you get nothing. What matters is whether you are average, below average, or above average in regards to the parameter.

I did not experience a 7% inflation rate in my spending over the last year. Some things were higher, and some were lower. Many are difficult to quantify (e.g. I had a lot of medical expenses and I hit my out of pocket max, most years that doesn't happen and it had nothing to do with inflation). This out of pocket max could also be considered an inflation limiter for that expense. One I can see is my Pepsi 12 pack. I could almost always find those on sale for $3 or maybe less. Now, $4 is hard to beat and the sales are less often. That's a 33% increase.

I don't have a mortgage, but I do have property taxes. Not looking forward to seeing the tax assessment this year. Supposedly, the state portion of the taxes is capped at a 1% increase, but the local taxes and levies are not capped. I don't think it will be a 7% increase in taxes, but the assessed value probably went up at least that much.

I was a teenager in the late 70's and experienced that long period of inflation. My plan for the first 10 years of retirement (which started a year ago) is to allow for 7.2% inflation (basically I will double my available income in 10 years). After that, I think I'm planning for a 3% average inflation rate.

[Triple digit golfer]

The often-mentioned notion of beating inflation and a 0% real return should mean to beat one's own personal inflation rate.

If you match the CPI but your personal rate of inflation is lower than the CPI, you've got a positive real return.

That's nonsense. Inflation affects the real value of all of your assets. You can have a personal inflation rate of 0%, spend 0% of your assets, and all of your assets are still worth 7% less at the end of the year (than they would otherwise be in a zero inflation environment) if the official inflation rate for the economy was 7% that year.

That's nonsense. I'm talking buying power.

So you actually believe you have more "buying power" after a 7% inflation year then you had at the beginning of the year? WUT.

Read my post again. You clearly didn't understand it.

[toddthebod]

You hear it all the time. Your investments must have gains more than inflation or your losing money. Really?
Let's say you have 500k and inflation is 7%. That means you would need to make 35k to cover inflation.
So you really had an increase in your cost of 35k last year? I think not.
It would seem that you should base the amount on your expenses that are affected by said inflation. Like gas, food, entertainment, etc.. So let's say those cost are 100k. That's just 7k of inflation for the year. A long way from 35k.
Even at 7k. Did your cost really go up that much last year? So just be careful thinking that you really need to out pace the inflated inflation percentage with your investments!

Your only valid point is that a personal inflation rate is what counts. Sometimes you hear things all the time because they're correct.

No, personal inflation rate doesn't matter at all. It's illusory. I can change my "personal inflation rate" arbitrarily by simply selecting different quantities and types of goods and services to consume. But doing so doesn't change, at all, how inflation impacts my assets. In fact, the economy wide inflation rate out of necessity automatically incorporates these sorts of individual consumption choices/preferences.

If steak doubles in price In January, overall people will stop buying so much steak, and start buying more chicken (for example), which let's say is much cheaper at the beginning of the year. The amount of steak bought will tend to decline, and based on supply and demand, the price of steak will tend to decline; the amount of chicken bought will tend to increase, and the price of chicken will tend to increase, until a new equilibrium is reached.

So every individual's preferences and choices, and changes in those preferences and choices as a result of inflation re: their consumption are already part of the official inflation rate.

If steak doubles, it doesn't matter whether or not you personally choose to eat steak. If you want to buy steak, it will cost you double too. If you are choosing to buy chicken instead of steak because steak doubled, then of course the official inflation rate impacted you--it limited your ability to spend your available assets on a prior consumption item, steak (assuming you used to buy steak and had to stop because when it doubled, it no longer could be fit into your personal budget.)

And the argument is valid even if you don't like steak and would never buy steak at any price. Your MONEY can only buy half as much steak.

Same applies if the overall inflation rate is 7% for the entire economy. Your money only buys 93% of what it bought the year before, and it doesn't matter what you specifically choose to buy, even if you buy nothing at all.

People don't really substitute clothes for steak, though. That's why personal inflation rate matters. Not everybody buys the same things every month. When the overall inflation rate is "7% for the entire economy," my expenses may have gone up 5% and yours may have gone up 10%, because maybe you drive a gas guzzler and I have a Prius, while you pay rent, and I have a paid off mortgage.

I don't care if my "MONEY can only buy half as much steak" if I never eat steak and never will.

[Triple digit golfer]

You hear it all the time. Your investments must have gains more than inflation or your losing money. Really?
Let's say you have 500k and inflation is 7%. That means you would need to make 35k to cover inflation.
So you really had an increase in your cost of 35k last year? I think not.
It would seem that you should base the amount on your expenses that are affected by said inflation. Like gas, food, entertainment, etc.. So let's say those cost are 100k. That's just 7k of inflation for the year. A long way from 35k.
Even at 7k. Did your cost really go up that much last year? So just be careful thinking that you really need to out pace the inflated inflation percentage with your investments!

Your only valid point is that a personal inflation rate is what counts. Sometimes you hear things all the time because they're correct.

No, personal inflation rate doesn't matter at all. It's illusory. I can change my "personal inflation rate" arbitrarily by simply selecting different quantities and types of goods and services to consume. But doing so doesn't change, at all, how inflation impacts my assets. In fact, the economy wide inflation rate out of necessity automatically incorporates these sorts of individual consumption choices/preferences.

If steak doubles in price In January, overall people will stop buying so much steak, and start buying more chicken (for example), which let's say is much cheaper at the beginning of the year. The amount of steak bought will tend to decline, and based on supply and demand, the price of steak will tend to decline; the amount of chicken bought will tend to increase, and the price of chicken will tend to increase, until a new equilibrium is reached.

So every individual's preferences and choices, and changes in those preferences and choices as a result of inflation re: their consumption are already part of the official inflation rate.

If steak doubles, it doesn't matter whether or not you personally choose to eat steak. If you want to buy steak, it will cost you double too. If you are choosing to buy chicken instead of steak because steak doubled, then of course the official inflation rate impacted you--it limited your ability to spend your available assets on a prior consumption item, steak (assuming you used to buy steak and had to stop because when it doubled, it no longer could be fit into your personal budget.)

And the argument is valid even if you don't like steak and would never buy steak at any price. Your MONEY can only buy half as much steak.

Same applies if the overall inflation rate is 7% for the entire economy. Your money only buys 93% of what it bought the year before, and it doesn't matter what you specifically choose to buy, even if you buy nothing at all.

People don't really substitute clothes for steak, though. That's why personal inflation rate matters. Not everybody buys the same things every month. When the overall inflation rate is "7% for the entire economy," my expenses may have gone up 5% and yours may have gone up 10%, because maybe you drive a gas guzzler and I have a Prius, while you pay rent, and I have a paid off mortgage.

I don't care if my "MONEY can only buy half as much steak" if I never eat steak and never will.

Yep. Pretty simple concept to understand. I don't care what something costs if it's not something I ever buy.

[ScubaHogg]

I think you may be missing part of his point. Inflation rate can be personal. e.g. I have a fully paid off house. I'm not exposed to housing cost inflation (unless you are dinging me for imputed rent) in the same way a renter whose rent may increase annually at a market rate might be. Someone else may have a really generous health plan with premiums mostly or entirely paid by their employer, they aren't exposed to inflation in the way I am with a Health Connector plan.

Prepaying future expenses can be a good way to lock in a cost of living, at least for a time. But even in housing you are still very affected by inflation, just indirectly or on a different time scale.

And my opinion is we should ding you for imputed rent. But that’s me

Fair, I mentioned imputed rent because it is clearly an important concept if one is accounting or choosing between alternatives. But it isn't impacting my actual cash flow in a way that, say, a rent increase does to a renter, grocery prices do for the huge majority of us who don't grow our own food (which I guess has its own imputed costs), or a premium increase do for the various insurances I carry.

Yeah, but it’ll affect the next place you move to (if u ever do). Of course, I’d expect current housing values to more or less keep up with inflation. But that’s a different animal than saying one is unaffected by inflation.

[GreenLawn]

Month to month inflation right now is running near zero right now. So, most everyone underperformed against inflation in 2022, but now we are outperforming inflation. Look at long term treasury bonds. They show the expected inflation over the long term is lower than near-term inflation. Therefore, keep being focused on the long term and you have a very high percentage chance at outperforming inflation. Even though, in short term bursts, inflation may outperform.

Every month, for the past five months, I’ve outperformed inflation - I suspect you have too. I view this recent performance as a chance to climb out of the hole of underperforming inflation in early-to-mid 2022.

Good point about current inflation, I wonder how long it will take at our current ROI to make up for last year's inflation? Depending on one's financial circumstances, it may turn out that this fuss about inflation was much ado about nothing, at least on a personal level.

Yes, I had to pay more last year due to inflation, but my MMF is currently earning somewhat over 4% and should go higher with the Fed hikes, so if current conditions (minimal month on month inflation for me personally) prevail I'd expect to be made whole maybe by the end of this year.

[smooth_rough]

Inflation can be difficult to understand if person never had the base courses and doesn't understand difference between micro-economics (personal monthly budget) and macro-economics (monetary policy, banking, financial markets). There's only so much cost cutting you can do as the greater economy around you changes. Anybody who says otherwise is gaslighting. Who would have incentive to "gaslight" you? Politicans who want your vote, financial advisor who put you into bad investments, other various?

[KlangFool]

There's only so much cost cutting you can do as the greater economy around you changes.

smooth_rough,

Which is obviously wrong.

"It depends"

Personal finance is personal. This is an inconvenient fact for those that claim otherwise. For any household, there are fixed annual expense and discretionary spending. If someone's annual expense are largely discretionary, the person has the choice of not spending the money. They are discretionary.

Some household spends a large percentage of their annual expense in basic food and shelter. Some don't.

"Inflation can be difficult to understand "

I disagreed. Inflation is easy to understand. Personal finance is hard. It is obvious from this thread that many folks do not understand personal finance.

KlangFool

[vxdx]

Yes, inflation matters, specifically as it affects your personal long term expenses, but OPs question seemed more general than the semantic difference between CPI and a personal inflation rate.

Yes, my personal expenses didn’t increase by 35k in one year but unless next year has 6.6% deflation, my expenses are increased in perpetuity and that 500k buying power is reduced in perpetuity.

One illustrative note, inflation compounds just like investment returns, so unless you keep up you would fall further and further behind.

[Harmanic]

Recent BLS stats show that wage inflation is around 4-7% depending on the sector, but with the labor shortage, people are working longer hours to take up the slack and therefore annual wages are up 20% even as hourly wages are barely keeping up with inflation. I am not sure what this means for inflation going forward, but it seems that many people are indeed "out earning it."

[GreenLawn]

Recent BLS stats show that wage inflation is around 4-7% depending on the sector, but with the labor shortage, people are working longer hours to take up the slack and therefore annual wages are up 20% even as hourly wages are barely keeping up with inflation. I am not sure what this means for inflation going forward, but it seems that many people are indeed "out earning it."

Walmart announced they are increasing their minimum wage from 12 to 14 dollars an hour, which by my calculation is a 16.7% increase. Presumably this will affect other low wage employers in the vicinity of a Walmart.

The current unemployment rate is 3.4% I thought Gen Z was supposed to be suffering? Not too long after I graduated high school the national unemployment rate was in double digits.

I always felt I was born too early, but the disparity between my young life vs. today is starting to get ridiculous.