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How does inflation factor in to your life


There’s No Magic Inflation Number

Inflation can be defined as a sustained increase in prices for general goods and services in the economy and is typically measured annually. Theoretically speaking, as inflation rises, every dollar you own buys a smaller percentage of a good or service.  While the reported inflation rate (typically reported as the CPI or Consumer Price Index)  is important for Social Security income calculations, it may not accurately reflect your individual inflation rate.

According to the Wall Street Journal, the overall inflation rate is running less than 2% per year, but that figure masks a division between goods and services.  The cost of services is climbing while prices for goods are declining. For example, a man's suit is 3.7% cheaper than it was in 2010 but 9.2% more expensive to dry clean. TV prices have fallen nearly 58% over the same period, while cable TV service costs 13.7% more.  

Similarly, the inflation rate for higher education compared to the overall economy has run much hotter than other costs over the past three decades. But as the population of 18 year-olds declines, we see an ebbing of higher education price increases.

Goods can usually be produced anywhere.  In an economy where dollars travel freely, buyers typically purchase from the low cost provider who delivers the desired level of quality. Your toaster can come from China but your barber (a service) better be in the neighborhood! As international trade and transportation logistics continue to improve, we see a natural downward pressure on the price of goods. But the service sector is another story.

We get to choose some financial expenses and lifestyle choices, but others we must accept. A question commonly asked by individuals planning to retire is how to calculate the future rate of inflation.   Calculating future price increases   is central to anticipating annual income needs.  Sadly, there is no “magic” number. In my experience, the assumed number is usually flawed and can vary significantly from one family to the next.

For example, if you enjoy travelling, you will likely incur many service expenses including hotels, dining and transportation; thus you should expect travel inflation will be higher than the reported CPI. In my experience, travel expenses tend to increase in the early years of retirement and slow in the late 60’s.  

On the other hand, if you are a homebody who does your own yardwork and home improvements, then you will likely experience lower inflation levels relative to your traveling friends. The key takeaway point is that your personal inflation rate is unique based on your age and your lifestyle. When we look at the overall economy, the headline CPI number is important as a general gauge.

The more we consider prices as they relate to goods and service aspects of the economy – and the lifestyle of the investor - the more accurate we can be in estimating an inflation number.  For now, airlines are loving lower oil prices and young folks buying their first television are smiling ear to ear.

Joseph “Big Joe” Clark is a Certified Financial PlannerTM and the Managing Partner of the Financial Enhancement Group, LLC, an SEC registered Investment Advisor. He is the host of “Consider This” found on WQME Saturday mornings at 9 and serves as an Adjunct Assistant Professor at Purdue University where he teaches the capstone course for a degree in consumer counseling and financial planning. Securities offered through World Equity Group, Inc., member FINRA/SIPC, a broker dealer and SEC registered Investment Advisor. Advisory Services can be provided by Financial Enhancement Group (FEG) or World Equity Group. FEG and World Equity Group are separately owned and operated and are not affiliated. Big Joe can be reached at bigjoe@yourlifeafterwork.com, or (765) 640-1524.

 

 

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