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The numbers I'm presenting here represent the total of 3 polls, one of which was posted on this board. I should note that there was very little difference in results from board-to-board, although Mishedlo board had the widest range of results in all categories.

Based on the results, there appears to be a bias toward the low end of the ranges.

45% of respondents use a range which corresponds to the average inflation rate from 1913 through 2004, which was 3.42%.

30% of respondents use a range which corresponds to the period of 1914-1959, which averaged 2.57%.

2% (2 respondents) use a range that corresponds to the period of 1921-1940, the only extended period in which the inflation rate was below 2% (and actually was negative). This included the period of The Great Depression.

Therefore, a full 32% are using estimates that are well below the historical average.

Only 18% of the respondents are using a range that corresponds to the most current extended period, 1960-2004, which averaged 4.28%.

6% use a range above 4.75%, which occurred during 3 non-consecutive decades, the teens, the 40s, and the 70s.

When compounding inflation rates over time, even a ¼ percentage rate difference can make quite a large difference, while ½ percent could mean the difference between running out of money 10 years before one expects, or having something left after all.

Any thoughts as to why so many might be underestimating future inflation rates?

2old
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It is probably due to the fact that every time we turn around, we hear about inflation running at 3%.

JLP

http://AllThingsFinancial.blogspot.com
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Any thoughts as to why so many might be underestimating future inflation rates?

Maybe they just picked a random number for the poll.

IF

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Hi 2old,

I actually use a dual stage inflation projection in my analysis. I have one stage that projects "inflation in my working years", and another that projects "inflation in my retired years." The last time I ran my numbers, I used 3% for my working years rate and 5% for my retired years rate.

My rationale for the dual stage approach is that most of the high-inflation items (save energy and food) seem to be in the "services" side of the economy. The price of goods seems to be relatively stable, especially when compared to the rapid price increases in medical and other personal services. In my working years, I expect to be less dependent on personal services, only to see those needs increase over time as I age. Since as I age, more of my money will be going towards high inflation services, I expect my inflation rate to pick up over time.

If I had to make a wild guess, I would probably guess that the younger among us are probably using the lower rates, whereas the more seasoned among us are likely using the higher ones. Why? If my analysis is correct that the older folks get the higher the proportion of their money gets spend on services, then those who are experiencing the higher inflation associated with skyrocketing service costs are those more likely to use a higher inflation rate in their personal analyses, because that's what they're seeing in their lives.

Regards,
-Chuck
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Chuck,

That's certainly understandable. I can't imagine what medical care is going to cost when I retire. The cost of healthcare has to be number one on most retiree's minds.

JLP

http://AllThingsFinancial.blogspot.com
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Anyone who wns a home will experience real inflation at a lower rate than some who rents or who is going to be buying a new home.

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Any thoughts as to why so many might be underestimating future inflation rates?

The trade deficit hit another record.
http://money.cnn.com/2005/02/10/news/economy/trade/index.htm?cnn=yes

Other than the US, large persistent trade deficts preceed a currency colapse, and high inflation.

Maybe they think this time its different?

-Joe
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What would you have us do? Slap high tariffs on cheap imports? This would, once again, gain the ire of the WTO, as well as angrying Americans who are hooked on cheap foreign goods. The US doesn't have the position it used to have with protected technologies, or the ability to produce goods cheaply that others can't produce at all. American goods cost too much; both on the world market and here at home. In order to regain world market share, that cost has to go down. There are a number of ways to do it. It seems to me that the government has chosen to devalue the dollar as one way to accomplish this. Whether the dollar can be devalued at a slow enough rate is the question.

Hedge
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What would you have us do? Slap high tariffs on cheap imports? This would, once again, gain the ire of the WTO, as well as angrying Americans who are hooked on cheap foreign goods. The US doesn't have the position it used to have with protected technologies, or the ability to produce goods cheaply that others can't produce at all. American goods cost too much; both on the world market and here at home. In order to regain world market share, that cost has to go down. There are a number of ways to do it. It seems to me that the government has chosen to devalue the dollar as one way to accomplish this. Whether the dollar can be devalued at a slow enough rate is the question.

I'd like to see a regulatory tariff. The playing field is not very level right now. Goods from some foreign countries don't have to contend with regulations like OSHA or EPA.

IF

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What would you have us do? Slap high tariffs on cheap imports?

no

This would, once again, gain the ire of the WTO, as well as angrying Americans who are hooked on cheap foreign goods.

yup

Whether the dollar can be devalued at a slow enough rate is the question.

There are several ways this can unwind. If it happens through a devaluing of the currency, then I agree that is the key question.

In my prior comment I wasn't trying to imply anything other than the situation presents the risk of increasing inflation. And make an attempt at humor with the "this time its different" phrase since its a popular quote.

-Joe
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Hedge,

I think the media has overblown this whole deficit thing. If the dollar keeps falling, foreign companies will to have to raise prices if they want to make money in the US.

For the most part we have brought this all on ourselves. We keep making it harder and harder for businesses to compete so that they just simply pack it up and move production overseas. I think companies should be accountable, but at the same time, I think the government, companies, unions, and employees HAVE to work together. What good does it do for a union to get a rich contract if it makes the prices of their goods so expensive that people buy the foreign product?

JLP

http://AllThingsFinancial.blogspot.com
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If I had to make a wild guess, I would probably guess that the younger among us are probably using the lower rates, whereas the more seasoned among us are likely using the higher ones.

I tend to agree with the statement above, but my analysis as to why is different. I think the older folks have experienced double-digit inflation, while the younger ones haven't. There's a tendency in the young to think bad things can't happen to them (I think psychologists call it "the invulnerability" something--how's that for a senior moment?). As we age most of us become more realistic, as we ourselves, or our close friends and relatives, experience many of these negative things that we used to think could never happen.

I actually use a dual stage inflation projection in my analysis. I have one stage that projects "inflation in my working years", and another that projects "inflation in my retired years."

That's a great idea, and I understand your rationale completely. (I must admit it would be too much work to incorporate it into my spreadsheet though ;-)

Thanks for the response,

2old


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In my prior comment I wasn't trying to imply anything other than the situation presents the risk of increasing inflation. And make an attempt at humor with the "this time its different" phrase since its a popular quote.

Joe,

Even so, I'm still not sure what other options are open to the US right now, for the reasons I listed. My belief is that the USD is just worth too much WRT other currencies. Drawing it down so that we can become competitive is a problem. We do not want to compete directly, as that will necessitate a drastic reduction in the standard of living for the average American. Technology or no, we can't compete head to head against foreign industry that is unregulated. Our best bet seems to be to make foreign industry choke on their own success by making consumers out of their countrymen. How long it will take for them to demand a standard of living on par with us is the question.

Hedge
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I think the media has overblown this whole deficit thing. If the dollar keeps falling, foreign companies will to have to raise prices if they want to make money in the US.

Yup, that's the whole idea. If we can't equalise prices with a tariff, we can equalise with dollar value.

Hedge
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