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Author: galt67 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 726480  
Subject: Is inflation that bad??? Date: 3/13/2000 8:12 PM
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I know I'm going to come across horribly naive and ignorant with this question but, 'what is the practical effects' of 3% inflation (the average annual rate for last 50 years).

Let's say, for example, I own my house-debt free. Same with my car. Now let's say inflation is running at a 'high' of 6%-gas prices are rising, housing costs are increasing, etc. All pushing up the CPI.

So what is the 'real' effect on my day to day purchases?? As someone mentioned on this board, if the price of rice increases significantly, I'll buy beans-or someother substitute. Let's say a winter freeze hits FL wiping out the orange crop thereby pushing up orange juice prices-which will be factored as 'inflationary'-Couldn't I buy grape juice, instead?

Or how about clothes? Ten years ago I bought a nice dress shirt for $40 at a department store. I know I could buy a similar or better shirt for equal to or less than that today. Of course you see the same thing with computers, airline fares, so on.

I'm not looking for someone to the explain 'causes of inflation' (read Mises, Hayek, Friedman for that) but, during the early 80's, with inflation in the double digits, how did it DIRECTLY affect your life-besides waiting in line for gas.

My theory-If 'high' inflation returns, we as rational persons can make choices and find subsitutes that will dramatically offset its effects-so maybe an early retiree's fear of inflation is overblown(?)-Or am I wrong???
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Author: BuildMWell Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6022 of 726480
Subject: Re: Is inflation that bad??? Date: 3/13/2000 9:03 PM
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I do not have time to explain, but inflation is terrible for some and a blessing for others. If you own stocks and bonds, inflation hurts really bad.

If you own collectable cars, antiques, homes and other appreciating assets, inflation causes your asssets to soar in value...on paper, you are making money. But, you have to sell to make money and most people do not sell. Stuff is hard to get rich on. Meanwhile, the liquid assets are going in the toilet.

Overall, you are fooling yourself if you think you are gaining when inflation is too high.

On the other hand, some inflation is good. Between 1 and 3% is, to some extent, healthy. It beats deflation which is another subject altogether.

In a nutshell, inflation comes from too much money being placed into circulation. The Fed controls this and it is necessary for them to show fiscal restraint. Control of the money supply has more to do with inflation control than any other factor.

But, that is just my opinion.

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6023 of 726480
Subject: Re: Is inflation that bad??? Date: 3/13/2000 9:09 PM
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galt67 asks,

My theory-If 'high' inflation returns, we as rational persons can make choices and find subsitutes that will dramatically offset its effects-so maybe an early retiree's fear of inflation is overblown(?)-Or am I wrong???

I agree that substitutes are possible in most areas of expenditure, with the possible exception of health care.

The March 6, 2000 issue of Fortune magazine has a very interesting article on health care. By 2040 they predict that U.S. health care costs will consume 1/3 of the GNP (page F-28). They also joke that in 2020 some of the bio-tech breakthroughs that may actually cure diseases like arthritis will only be available to those whose "finances aren't devastated in the crash of 2011." (page F-26) <grin>

I guess Fortune figures a lot of HMO's won't be approving these life saving procedures for the masses.

intercst

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Author: cmorford Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6024 of 726480
Subject: Re: Is inflation that bad??? Date: 3/13/2000 9:22 PM
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Ok, so are REITs a good investment during inflationary periods?

I know next to nothing about them, anything you post will be good info for me....

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Author: dwade Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6025 of 726480
Subject: Re: Is inflation that bad??? Date: 3/13/2000 10:02 PM
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Ok, so are REITs a good investment during inflationary periods?

I know next to nothing about them, anything you post will be good info for me....


I can see REITs going either way. I'm sure what you're thinking is that if there's inflation, you want your money to be in 'stuff' and what better stuff than land. But if the inflation is part of an overall economic disaster (hey, it happens) holding a lot of unoccupied commercial real estate, or land for storage centers that people can't afford anymore isn't going to help you a whole lot. But, yeah, there are probably REITs that would be great investments in inflationary periods. The trouble is finding them, and knowing you have something good for the long haul inflation or no.

Doug


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Author: dwade Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6026 of 726480
Subject: Re: Is inflation that bad??? Date: 3/13/2000 10:31 PM
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Let's say a winter freeze hits FL wiping out the orange crop thereby pushing up orange juice prices-which will be factored as inflationary'-Couldn't I buy grape juice, instead?

Assuming you like grape juice, sure. Let's take it as an assumption that you can avoid certain kinds of one-shot price hikes as long as the price does recover eventually. This may not be true if you're addicted to coffee and it goes through the roof, but whatever. :)

My theory-If 'high' inflation returns, we as rational persons can make choices and find subsitutes that will dramatically offset its effects-so maybe an early retiree's fear of inflation is overblown(?)-Or am I wrong???

You're right as far as it goes. But there's a difference between avoiding orange juice one year because of a disaster and avoiding it for the rest of your life because you can't afford it anymore.

So basically you're going to have a couple of competing issues that I think you're kind of mixing together.
1. You'll have occasional one-shot price hikes -- no big deal if you're not picky because the prices will recover.
2. You'll have some items that just get cheaper and better -- totally out of line with the CPI (computers).
3. You'll have some items that just get more and more expensive -- totally out of line with the CPI (health care).
4. Most items will just kind of gradually get more expensive for no obvious reason. No big deal in one year, but over the long haul it adds up. This is a case where our best friend compounding has a dark side.

Here's where things get ugly. If you were working during the 80s and had the high inflation, it hurt. But eventually your wages would catch up and so forth. So then it's a period of 'low' inflation and everythng's OK, right, because your wages are keeping up. They inflated right along with the prices. In effect, they just are another price from the point of view of your employer. The only thing that caused pain was the lag between the inflation and the wages catching up.

Well, that's great but if your money comes from investments if you didn't leave enough room in your plan for that rate of inflation getting to that period of 'low' inflation didn't help any. That's because unlike wages if prices double your income doesn't magically double. Here's the key bit: when prices are twice what you planned on, it hardly matters that they're only growing at 2% going forward. . .

Doug


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Author: TheBadger Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6028 of 726480
Subject: Re: Is inflation that bad??? Date: 3/13/2000 11:12 PM
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IMVHO, we need to look at inflation from two perspectives:

1. In periods of high(er) inflation; we all need to:



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Author: TheBadger Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6027 of 726480
Subject: Re: Is inflation that bad??? Date: 3/13/2000 11:12 PM
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IMVHO, we need to look at inflation from two perspectives:

1. In periods of high(er) inflation; we all need to:



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Author: TheBadger Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6029 of 726480
Subject: Re: Is inflation that bad??? Date: 3/13/2000 11:23 PM
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IMHO, we need to treat with inflation at two levels: during periods of high(er) inflation, we need to:

1. Hold scare commodities. These would include any naturally scare resource (gold, silver, platinum, pladium, copper, etc). as well as any man produced scarcity (artwork, coinage, philatelic items). OH, I almost forgot, how about DIRT; forget the home built on it; focus on the dirt.

2. Be wary of the xx billion people's focus on the effect of inflation on the stock & bond markets. The stock & bond markets maybe fundamentally fine but people's beliefs of inflation's effect on these markets is actually more important; generally, that these markets will do poorly when inflation is relatively high in historical comparison.

All else being equal, this Badger would prefer a 0% inflationary environment but will suffer through 1% or 2% or 3%. The instant inflation hits double digits (or long before); I will sell every equity I own and look closely at the non-equity-market assets I do own: philatelic assets (which I modestly understand) & big hunks of terra-firma (dirt).

TheBadger
(always looking for an inverted Curtis-Jenny or the next piece of dirt)


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Author: Daryll40 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6041 of 726480
Subject: Re: Is inflation that bad??? Date: 3/14/2000 6:56 AM
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My theory-If 'high' inflation returns, we as rational persons can make choices and find subsitutes that will dramatically offset its effects-so maybe an early retiree's fear of inflation is overblown(?)-Or am I wrong???

I'd say you are partially right and partially wrong. If inflation returns with a vengance, you will still get hit with higher living costs. Cars don't last forever, although they do now last for 10-20 years if you maintain them well (which is subject to inflationary costs). Your paid off house will rise in value but if you ever wanted to move you'd have to use that same increased value for new housing (assuming you wanted the same size and area house). Medical costs are something that you might not have control over, especially as you age you might need quite a bit of it.

Bottom line is that while someone out of debt and with an eye to cost control can switch from lettuce to cabbage if need be, but a nasty dose of inflation will hurt even the most frugal among us.









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Author: rkmacdonald Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6056 of 726480
Subject: Re: Is inflation that bad??? Date: 3/14/2000 11:41 AM
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galt67 wrote:
So what is the 'real' effect on my day to day purchases??

I have done quite a bit of thinking on this topic. I call this one's 'Personal Rate of Inflation' or PROF. I think that with a little research, everyone could calculate this.

The way you do this, is to look at your monthly expenses one at a time and determine which of those are are increasing with the rate of inflation and which are not. I used to do this during the early 80's when inflation was running rampant, and when the official number showed an inflation rate of 12%, my 'PROF' was only 1.8%.

The main reason for this was that many of my big monthly costs were not being affected by inflation. For instance, my house was locked in to a fixed interest rate, so housing inflation didn't affect me. I was also quite frugal, and was not buying many things, so huge increases in the costs of durable goods did not affect me.

Restaurant prices were sky-rocketing in the 80's as well, so, we just didn't go out to eat. Another inflation contributor that didn't affect me.

Food, clothing, and fuel made up my primary areas of concern. These were affecting my PROF. But, if you go back and look, these had rates of inflation much lower than the overall indicators.

BTW, I also put off buying a new car for several years.

-rkm

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Author: jpkiljan One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6077 of 726480
Subject: Re: Is inflation that bad??? Date: 3/14/2000 3:42 PM
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rkmacdonald wrote:

I have done quite a bit of thinking on this topic. I call this one's 'Personal Rate of Inflation' or PROF. I think that with a little
research, everyone could calculate this. . . .


I really like this concept and I think it should add some security to ER's. Inflation can be a real killer on bond holders and some other investment instruments but it doesn't have to mean "We're gonna have to start eating catfood, Martha!" to the long retired. I first started thinking about about this when I read YMOYL where Dominguez/Robin start quoting the price of chickens in the 70's and early 90's, Are Our Fears of Inflation Inflated? p. 299

I didn't buy the whole argument, but the points made are certainly valid. For many of the the things that really matter to our personal happiness (food, shelter, clothing, transportation, entertainment, etc) inflation has been a non-event over the decades. Even where it has marched up along with the CPI, the products we are getting are much better (bigger houses, safer and more fuel-efficient cars, better medicines, more TV channels, etc).

International trade and increased productivity for industry and society as a whole have really helped lower the cost of living for all Canadians and Americans. It really is amazing: I just bought six beautiful breakfast cereal bowls (made in China) that will last for a decade for less than the price of a big Mac meal. I think this productivity/trade trend is going to continue for some time.

Moreover, as you suggest, our ability to shift from one product to another should keep our PROF in check for many decades to come. As an example, even though gasoline (and probably fuel oil) costs have recently jumped 50%, my utility bill for gas and electricity (and probably coal prices) have stayed the same. How can you continue to charge a big price for fuel oil when natural gas is so cheap? Other comodity prices (paper, metals) still drag along at historic lows with no signs of a let-up.

Moreover, if demand for natural resources begins to drop in the latter part of the decade--as some demographers now predict (retiring baby boomers)--things should get even better for today's ER's. The only dark clouds on the horizon I can see are the rising cost of health care and a college education. The latter (now rising at about 6% per year), I still can't figure out, but at least the Canadians seem to have the first under control and the Americans will figure it out sooner or later.

"Hold the catfood, Martha. Our Deutsche Telekom local phone bill just went down and there's a pork roast on sale for 49 cents a pound at Safeway."

Best to all ER's,
-- John

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Author: hocus Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6080 of 726480
Subject: Re: Is inflation that bad??? Date: 3/14/2000 4:12 PM
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I call this one's 'Personal Rate of Inflation' or PROF. Look at your monthly expenses one at a time and determine which of those are are increasing with the rate of inflation and which are not.

To me, this seems consistent with other Retire Early principles. We don't use the standard date for retirement, but calculate our own based on our particular circumstances. We don't use the standard rules of thumb for how much we need to save or for how much we need to support a retirement either. So why not calculate an inflation rate with more personal relevance than the one put out by the government?

One reason why inflation is particularly worrisome is that a small miscalculation in Year One can grow into a big problem 20 years down the road. I plan to check the accuracy of my inflation assumption each year when I revisit my budget numbers.

Assume that you plan on living on $25,000, and are assuming a 3 percent inflation rate. That means that, at the end of Year One, you can add $750 to your budget. If you find at that time that it's easy to live on less than $25,750, you are in good shape (at least for the time-being). If it is taking you more than $25,750 to get by at that point, you need to address the problem fast because it will grow out of control as years go by.

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Author: backslash Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6081 of 726480
Subject: Re: Is inflation that bad??? Date: 3/14/2000 4:21 PM
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International trade and increased productivity for industry and society as a whole have really helped lower the cost of living for all Canadians and Americans. It really is amazing: I just bought six beautiful breakfast cereal bowls (made in China) that will last for a decade for less than the price of a big Mac meal. I think this productivity/trade trend is going to continue for some time.

Hmmm...I don't know about that. What if the Chinese workers, being exposed to freedom, decide they won't work in slavery conditions anymore? I suspect productivity would drop significantly if they were to start getting paid enough to survive. Suddenly your bowls would cost a price similar to American made bowls, cutting into your Big Mac consumption, and impacting the share price of MacDonald's. Then we'd be in BIG trouble!

Harley

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Author: omalleypm Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 8309 of 726480
Subject: Re: Is inflation that bad??? Date: 4/23/2000 9:47 AM
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I agree. My spreadsheet takes expenses and increases them by an inflation percent. However, I make that variable. My sewer bill has not increased in seven years, so I increase that 1% per year in my projections. Homeowners insurance increases every year, so in my projections I increase this 10% per year. There may be no way to avoid inflation, but there are ways to minimize its effects.

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 8311 of 726480
Subject: Re: Is inflation that bad??? Date: 4/23/2000 11:49 AM
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omalleypm wrote,

I agree. My spreadsheet takes expenses and increases them by an inflation percent. However, I make that variable. My sewer bill has not increased in seven years, so I increase that 1% per year in my projections. Homeowners insurance increases every year, so in my projections I increase this 10% per year. There may be no way to avoid inflation, but there are ways to minimize its effects.

Good idea.

What inflation rate do you use for health insurance premiums?

intercst

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Author: omalleypm Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 8312 of 726480
Subject: Re: Is inflation that bad??? Date: 4/23/2000 11:58 AM
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intrcst wrote:

Good idea.

What inflation rate do you use for health insurance premiums?

intercst

I use 10% annual increase in premiums. Not sure if this is low or high.

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 8315 of 726480
Subject: Re: Is inflation that bad??? Date: 4/23/2000 12:11 PM
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omalleypm wrote,

<<<<<intercst wrote:

Good idea.

What inflation rate do you use for health insurance premiums?>>>>>

omalleypm responded: intercst

I use 10% annual increase in premiums. Not sure if this is low or high.


My health insurance premium went up 20% in Jan. 99 and another 25% in Jan 2000. I'm paying about $3,000 per year now.

If it continues at 20% per year, what will my health insurance premium be in 2020 when I'm age 64?

$3,000 x (1.20)^20 = $115,013 per year!

intercst

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