What's Your Personal Inflation Rate?

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Scooter57
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What's Your Personal Inflation Rate?

Post by Scooter57 » Fri Dec 07, 2018 11:44 am

There is so much talk about how cash and CDs are a poor investment because they don't keep up with inflation. Those of us who survived the 70s and 80s can easily believe that because we were so traumatized by the inflation of the 1970s-1990s. I remember distinctly being infuriated in the mid 1990s when my landlord invested my refundable security deposit in a 5% savings account since our state required that the security deposit be invested. Five percent! What an outrage. But we all believed during that period that inflation could easily reach 7 or 8% a year and rates reflected that. But that was a long time ago, and I am starting to think that we may be giving inflation far too much weight in our investment decisions now.

How inflation is measured matters. There are quite a few different measurements and some debate as to which is the most realistic. But the inflation rate that matters most to me as an old codger is the inflation that affects my personal buying power. So I have been trying to estimate what the real cost of inflation would be for me over the next five years.

For example, I own my house free and clear and only replace my car every 7 or 8 years. (Thanks for the quality, Honda!) So inflation in the prices of housing and autos isn't a huge concern. I rarely travel and when I do to visit family, I drive. Gas prices have come way down this year. If the price of beef goes way up, we eat more pork, which seems to costs less now than it did a decade ago. My town property taxes are very reasonable for the services they provide and the difference from year to year is a rounding error of my net worth. My state taxes are going down next year, from 5.1% to 5%. My Federal income taxes, well, that's a puzzle. I'll find out exactly whether they go up or down when the tax software updates in January, as I am utterly baffled by how the small business tax thingie they implemented in the Trump tax cut will work out for us. And not for lack of reading up on the subject. But it looks like I might get a very small decrease.

Health care expenses continue to climb with higher deductibles, and could affect me if I got really sick, but so far I have been extremely lucky. I avoid taking pills and my Medicare Advantage plan costs have remained pretty stable over the past few years. Total costs are capped at $12,000 a year. (Thanks Massachusetts for your excellent health care laws!)

So when I look at all this it seems to me that my personal rate of inflation is, if anything, is trending negative.

If that is the case, there is no reason to avoid cash, is there? If inflation heats up--by which I mean hits 4 or 5% a year and stays there for a year I would reconsider my investments--but if that happened some investments would have to emerge that provide better yield.

They say people are always fighting the last war, and I think that might be what is happening with the whole concept of inflation now.

What is your personal rate of inflation? Are your overall expenditures rising at a rate that matches the official inflation rate?

sport
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Re: What's Your Personal Inflation Rate?

Post by sport » Fri Dec 07, 2018 12:08 pm

I don't keep track of my personal inflation rate for two reasons:
1. There is little I can do about it.
2. I find that unusual one-time expenses have a much greater effect on my spending than overall price increases. These expenses are unexpected, so I cannot plan for them.

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Re: What's Your Personal Inflation Rate?

Post by kolea » Fri Dec 07, 2018 12:19 pm

I don't assume an inflation rate, either personal or otherwise. I pretty much rely on market forces to set bond interest rates that track inflation, and then I keep the average maturity of the bonds I buy very low, around 2-3 years, to not get locked in to that interest rate.
Kolea (pron. ko-lay-uh). Golden plover.

adam1712
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Re: What's Your Personal Inflation Rate?

Post by adam1712 » Fri Dec 07, 2018 12:55 pm

Scooter57 wrote:
Fri Dec 07, 2018 11:44 am
There is so much talk about how cash and CDs are a poor investment because they don't keep up with inflation. Those of us who survived the 70s and 80s can easily believe that because we were so traumatized by the inflation of the 1970s-1990s. I remember distinctly being infuriated in the mid 1990s when my landlord invested my refundable security deposit in a 5% savings account since our state required that the security deposit be invested. Five percent! What an outrage. But we all believed during that period that inflation could easily reach 7 or 8% a year and rates reflected that. But that was a long time ago, and I am starting to think that we may be giving inflation far too much weight in our investment decisions now.

How inflation is measured matters. There are quite a few different measurements and some debate as to which is the most realistic. But the inflation rate that matters most to me as an old codger is the inflation that affects my personal buying power. So I have been trying to estimate what the real cost of inflation would be for me over the next five years.

For example, I own my house free and clear and only replace my car every 7 or 8 years. (Thanks for the quality, Honda!) So inflation in the prices of housing and autos isn't a huge concern. I rarely travel and when I do to visit family, I drive. Gas prices have come way down this year. If the price of beef goes way up, we eat more pork, which seems to costs less now than it did a decade ago. My town property taxes are very reasonable for the services they provide and the difference from year to year is a rounding error of my net worth. My state taxes are going down next year, from 5.1% to 5%. My Federal income taxes, well, that's a puzzle. I'll find out exactly whether they go up or down when the tax software updates in January, as I am utterly baffled by how the small business tax thingie they implemented in the Trump tax cut will work out for us. And not for lack of reading up on the subject. But it looks like I might get a very small decrease.

Health care expenses continue to climb with higher deductibles, and could affect me if I got really sick, but so far I have been extremely lucky. I avoid taking pills and my Medicare Advantage plan costs have remained pretty stable over the past few years. Total costs are capped at $12,000 a year. (Thanks Massachusetts for your excellent health care laws!)

So when I look at all this it seems to me that my personal rate of inflation is, if anything, is trending negative.

If that is the case, there is no reason to avoid cash, is there? If inflation heats up--by which I mean hits 4 or 5% a year and stays there for a year I would reconsider my investments--but if that happened some investments would have to emerge that provide better yield.

They say people are always fighting the last war, and I think that might be what is happening with the whole concept of inflation now.

What is your personal rate of inflation? Are your overall expenditures rising at a rate that matches the official inflation rate?
I agree with the spirit of your post but a pet peeve of mine is the term personal rate of inflation. I believe what you describe is better termed changes in cost of living. I think it's useful to think of it as only one inflation rate. When I go into a store, there's no price labels for Scooter57 and different prices for adam1712. We all use the same money and pay the same prices. Stocks, bonds, and CDs each give the same return whether you or I buy them. The value of the dollar does objectively change over time. But then what we choose to buy and the relative prices of different goods also change.

The personal prices of the goods you buy may not track inflation, but I don't think that should influence investments. Far better to assess how to be a smarter consumer and change what you spend your money on. Which I think you and a lot of Bogleheads do an excellent job of. I agree that my expenses haven't moved up much the past 5 years. I've seen a few things that have. For those I sometimes adjust, others I just pay more if it's worth it to me. The personal rate of inflation idea feels like an I'm helpless attitude to me. And just complicates investment strategy unnecessarily.

PVW
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Re: What's Your Personal Inflation Rate?

Post by PVW » Fri Dec 07, 2018 1:10 pm

I don't track my personal inflation, or even my changing budget. I do believe that inflation of the goods and services I currently use is the most relevant to budgeting and financial planning. Inflation of my total budget is also important, but I can control the lifestyle creep contributions to budget inflation.

The financial markets respond to their own inflationary forces, which could be significantly different than my personal inflation. Nothing I can do about market forces, but if I knew my personal inflation was different than average, that would affect my safe withdrawal rate.

Here is a Fed project to help you measure your personal inflation rate: https://www.frbatlanta.org/research/inf ... mycpi.aspx

Scooter57
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Re: What's Your Personal Inflation Rate?

Post by Scooter57 » Fri Dec 07, 2018 1:42 pm

PVW wrote:
Fri Dec 07, 2018 1:10 pm
Here is a Fed project to help you measure your personal inflation rate: https://www.frbatlanta.org/research/inf ... mycpi.aspx
I tried the Atlanta Fed calculator, but it seemed stupidly designed. It didn't ask me where I lived, for example, a very significant factor. It asked about my income level, but why would my income level influence my personal rate of inflation? I know a lot of people with very low incomes who drive much more expensive cars than I do, have more expensive homes, and pay full price for designer clothing. The calculator also didn't ask about what my credit card debt level was and whether I had a revolving line of credit.

It is true that the store doesn't differentiate between my rate of inflation or yours, but if I shop at Marshall's I pay 60% what I would pay at the shoe store seven stores down in the strip mall for the same shoes. In my rural region where we don't have any fancy department stores we all shop at Marshalls or TJMaxx unless we want to make a long drive. People who care about brand names have no choice but to pay less for them around here. <G>

I wonder to what extent these official inflation numbers take into account retail discounting? If you looked at shoe prices only at retail they would look like they had gone up, but when I compare what I paid for brand name shoes 3 years ago to what I pay now at Marshall's, it hasn't changed. Zero inflation. And of course, in real dollar terms those shoes and clothing cost a fraction of what they did in the 1960s.

delamer
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Re: What's Your Personal Inflation Rate?

Post by delamer » Fri Dec 07, 2018 3:59 pm

Inflation, as measured by the CPI, measures the change in prices of a fixed set of items. So if chicken thighs are one of the items and the price of chicken thighs goes up, it will cause an increase in the index.

Your substitution of pork chops for chicken thighs isn’t reflected in the CPI changes. That’s a change in expenditures, not inflation.

pdavi21
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Re: What's Your Personal Inflation Rate?

Post by pdavi21 » Fri Dec 07, 2018 4:04 pm

I use CPI-10% depending on lifestyle inflation.

My real inflation rate is in the double negative digits, however.
Somehow I am spending less and less every year, even as I've had two kids in the process.

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vineviz
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Re: What's Your Personal Inflation Rate?

Post by vineviz » Fri Dec 07, 2018 4:09 pm

delamer wrote:
Fri Dec 07, 2018 3:59 pm
Inflation, as measured by the CPI, measures the change in prices of a fixed set of items. So if chicken thighs are one of the items and the price of chicken thighs goes up, it will cause an increase in the index.

Your substitution of pork chops for chicken thighs isn’t reflected in the CPI changes. That’s a change in expenditures, not inflation.
+1

I'm amazed and confused at how persistently the term "inflation" is misused to refer to level of spending.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

GoldenFinch
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Re: What's Your Personal Inflation Rate?

Post by GoldenFinch » Fri Dec 07, 2018 4:24 pm

Our mortgage is paid off, but our property taxes are going up 5.7% in January. We are in a very high property tax city and I wonder if it will be worth staying here long term if the taxes for our house get up to the 20K a year range, which is a possibility. Anyway, that’s part of my “personal inflation.”

PVW
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Re: What's Your Personal Inflation Rate?

Post by PVW » Fri Dec 07, 2018 4:29 pm

vineviz wrote:
Fri Dec 07, 2018 4:09 pm
I'm amazed and confused at how persistently the term "inflation" is misused to refer to level of spending.
Usage as in "inflated spending" is consistent with the more general definition of inflation. But I agree that it doesn't match the economics definition, and it's often difficult to tell if someone is confused about what inflation is, or if they are using the general definition.

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Re: What's Your Personal Inflation Rate?

Post by dknightd » Fri Dec 07, 2018 4:38 pm

PVW wrote:
Fri Dec 07, 2018 1:10 pm


Here is a Fed project to help you measure your personal inflation rate: https://www.frbatlanta.org/research/inf ... mycpi.aspx
According to that the national CPI is 4% and myCPI is 3.7%. Not sure I'd put much faith in that.
It is interesting to click "Your CPI weights versus the average consumer" and see how I differ. Apparently I'm lower in most categories, except "other" ;)

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Phineas J. Whoopee
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Re: What's Your Personal Inflation Rate?

Post by Phineas J. Whoopee » Fri Dec 07, 2018 5:00 pm

adam1712 and others are correct. Inflation is a macroeconomic phenomenon.

My personal expenses went up last year and a little more this year, but both were mostly because of once-offs that I don't expect to recur. Anything else could happen, of course.

My weekly flexible budget is the same as a dozen years ago, even though cumulative inflation, according to the BLS inflation calculator, was 25%. I live just as well, eat just as well, but have found ways to economize that don't make my lifestyle less satisfying.

PJW

KlangFool
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Re: What's Your Personal Inflation Rate?

Post by KlangFool » Fri Dec 07, 2018 5:04 pm

OP,

My household annual expense stays about the same for the last 10 years. So, the answer is 0% for me.

KlangFool

Scooter57
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Re: What's Your Personal Inflation Rate?

Post by Scooter57 » Fri Dec 07, 2018 5:16 pm

vineviz wrote:
Fri Dec 07, 2018 4:09 pm

I'm amazed and confused at how persistently the term "inflation" is misused to refer to level of spending.
Well here's the thing. The academic definition of inflation is irrelevant to the question of whether or not investing in fixed income products like CDs will lead to your savings being "ravaged by inflation," which is something I see posted in discussion after discussion of conservative cash-heavy investment strategies. This fear mongering makes people feel like they are losing buying power just by holding safe, lower yielding instruments rather than investing in stocks.

But if the things I want to buy or have to pay for still cost the same or less five years on, have my savings been "ravaged by inflation?" My argument is that they have not. It is not costing me 4% more to live even if the CPI is 4%, and hence the CPI is irrelevant to me. If the things I have to pay for go up significantly, yes, I could be losing money investing in taxable CDs. But as it stands five years after I adopted a laddered CD strategy for a large proportion of my investable assets, I still have the same amount of money and it still buys the same amount of stuff.

Furthermore, were inflation to take off again, the stock market would likely take a few years to catch up as company profits would drop in response to rising costs before they recovered due to rising prices. Looking back at what happened to the market during the last period of significant inflation in the '70s and early '80s, it is likely I would have plenty of time to reinvest maturing CDs in the market.

I point this out because there is an inherent bias in a lot of posts here that just assumes that safe CDs lose money for investors over the long term, while also assuming that investing in stocks won't. Granted that the possibility of making more money is inherent in stocks, but that is only a possibility, not a certainty. Reasonable people looking into the future could see scenarios where the risk of a declining stock market that stays down for a long time and does not provide significant dividends grows greater than the risk of skyrocketing inflation that destroys conservative fixed income investments.

KlangFool
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Re: What's Your Personal Inflation Rate?

Post by KlangFool » Fri Dec 07, 2018 5:20 pm

Scooter57 wrote:
Fri Dec 07, 2018 5:16 pm
vineviz wrote:
Fri Dec 07, 2018 4:09 pm

I'm amazed and confused at how persistently the term "inflation" is misused to refer to level of spending.
Well here's the thing. The academic definition of inflation is irrelevant to the question of whether or not investing in fixed income products like CDs will lead to your savings being "ravaged by inflation," which is something I see posted in discussion after discussion of conservative cash-heavy investment strategies. This fear mongering makes people feel like they are losing buying power just by holding safe, lower yielding instruments rather than investing in stocks.

But if the things I want to buy or have to pay for still cost the same or less five years on, have my savings been "ravaged by inflation?" My argument is that they have not. It is not costing me 4% more to live even if the CPI is 4%, and hence the CPI is irrelevant to me. If the things I have to pay for go up significantly, yes, I could be losing money investing in taxable CDs. But as it stands five years after I adopted a laddered CD strategy for a large proportion of my investable assets, I still have the same amount of money and it still buys the same amount of stuff.

Furthermore, were inflation to take off again, the stock market would likely take a few years to catch up as company profits would drop in response to rising costs before they recovered due to rising prices. Looking back at what happened to the market during the last period of significant inflation in the '70s and early '80s, it is likely I would have plenty of time to reinvest maturing CDs in the market.

I point this out because there is an inherent bias in a lot of posts here that just assumes that safe CDs lose money for investors over the long term, while also assuming that investing in stocks won't. Granted that the possibility of making more money is inherent in stocks, but that is only a possibility, not a certainty. Reasonable people looking into the future could see scenarios where the risk of a declining stock market that stays down for a long time and does not provide significant dividends grows greater than the risk of skyrocketing inflation that destroys conservative fixed income investments.
In summary, you could be drowned in a lake with an average depth of 3 inches.

Inflation is a macro measurement. Personal finance is micro and specific to an individual.

KlangFool

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Phineas J. Whoopee
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Re: What's Your Personal Inflation Rate?

Post by Phineas J. Whoopee » Fri Dec 07, 2018 5:51 pm

Anyone who wants can use a well-established finance term of art to mean their own idiosyncratic definition, but it would be silly to suppose everybody else will understand the non-standard usage, let alone adopt it.
PJW

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Phineas J. Whoopee
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Re: What's Your Personal Inflation Rate?

Post by Phineas J. Whoopee » Fri Dec 07, 2018 7:23 pm

KlangFool wrote:
Fri Dec 07, 2018 5:04 pm
OP,

My household annual expense stays about the same for the last 10 years. So, the answer is 0% for me.

KlangFool
Real or nominal? Anyhow inflation is not household specific. It's across the economy.

Of course one's household expenses can change, however measured.

PJW

KlangFool
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Re: What's Your Personal Inflation Rate?

Post by KlangFool » Fri Dec 07, 2018 8:05 pm

Phineas J. Whoopee wrote:
Fri Dec 07, 2018 7:23 pm
KlangFool wrote:
Fri Dec 07, 2018 5:04 pm
OP,

My household annual expense stays about the same for the last 10 years. So, the answer is 0% for me.

KlangFool
Real or nominal? Anyhow inflation is not household specific. It's across the economy.

Of course one's household expenses can change, however measured.

PJW
PJW,

<<Real or nominal?>>

Nominal.

<<Anyhow inflation is not household specific. It's across the economy.>>

So, inflation is irrelevant in the context of specific household aka personal finance.

<<Of course one's household expenses can change, however measured.>>

Or not. If someone is strictly a "Pay It Yourself" saving person, he/she will only spend whatever is left after the saving. Then, the annual expense is fixed.

This is the difference between

A) Save first and spend later

versus

B) Spend first and save later

KlangFool

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Re: What's Your Personal Inflation Rate?

Post by AlohaJoe » Fri Dec 07, 2018 8:16 pm

delamer wrote:
Fri Dec 07, 2018 3:59 pm
Inflation, as measured by the CPI, measures the change in prices of a fixed set of items. So if chicken thighs are one of the items and the price of chicken thighs goes up, it will cause an increase in the index.

Your substitution of pork chops for chicken thighs isn’t reflected in the CPI changes. That’s a change in expenditures, not inflation.
This is wrong. The basket of goods changes. Obviously, right? We've been measuring inflation since 1913. No one really thinks that today we use the same basket of goods as was used in 1913. So everyone obviously is in agreement at a high level that substitution happens and that CPI tracks that substitution.

But even at a low level you are wrong. CPI absolutely tracks people buying fewer chicken thighs and more pork. It also tracks people buying less 90% ground beef and more 80% ground beef and other even smaller substitutions:
In 1999, BLS changed the way it calculated the CPI for many of the basic indexes, moving from a Laspeyres formula to a geometric means formula. (A basic index is an index for a particular item category and location; these basic indexes are the building blocks that are aggregated into the broader CPI measures, such as the all items index.) This new formula effectively presumes modest consumer substitution within item categories, correcting for what the Boskin Report termed “lower-level substitution bias.”
Phineas J. Whoopee wrote:
Fri Dec 07, 2018 5:00 pm
adam1712 and others are correct. Inflation is a macroeconomic phenomenon.
Inflation is the measure of the change in price of a basket of goods, along with substitutions in that basket of goods. That's all. You can define the basket of goods as "the things Scooter57 buys". That's why there are different baskets of goods for CPI-U, CPI-W, CPI-E, and various other subpopulations.
Phineas J. Whoopee wrote:
Fri Dec 07, 2018 5:51 pm
Anyone who wants can use a well-established finance term of art to mean their own idiosyncratic definition, but it would be silly to suppose everybody else will understand the non-standard usage, let alone adopt it.
It is not non-standard or idiosyncratic. Here is the Federal Reserve talking about "personal rate of inflation". https://research.stlouisfed.org/publica ... e-average/

And here's the Bureau of Labor Statistics on the same topic:
https://www.bls.gov/cpi/factsheets/aver ... differ.htm

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SevenBridgesRoad
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Re: What's Your Personal Inflation Rate?

Post by SevenBridgesRoad » Fri Dec 07, 2018 8:52 pm

But, bring this back to what I think the OP was exploring. (I’m speculating that the title of the post may not be precisely what he was after.)

The standard response to anyone stating they are allocating a large percentage of cash is ‘you’ll lose to inflation...you need more equities because of inflation.’ But if one’s personal purchasing experience is that of no price increases at the personal purchasing level, which several folks here are saying, then does the conventional wisdom hold? It’s an interesting observation.
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SevenBridgesRoad
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Re: What's Your Personal Inflation Rate?

Post by SevenBridgesRoad » Fri Dec 07, 2018 8:53 pm

Further, I don’t think he’s after a discussion of definitions. Guessing. I could be wrong.
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delamer
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Re: What's Your Personal Inflation Rate?

Post by delamer » Fri Dec 07, 2018 11:09 pm

AlohaJoe wrote:
Fri Dec 07, 2018 8:16 pm
delamer wrote:
Fri Dec 07, 2018 3:59 pm
Inflation, as measured by the CPI, measures the change in prices of a fixed set of items. So if chicken thighs are one of the items and the price of chicken thighs goes up, it will cause an increase in the index.

Your substitution of pork chops for chicken thighs isn’t reflected in the CPI changes. That’s a change in expenditures, not inflation.
This is wrong. The basket of goods changes. Obviously, right? We've been measuring inflation since 1913. No one really thinks that today we use the same basket of goods as was used in 1913. So everyone obviously is in agreement at a high level that substitution happens and that CPI tracks that substitution.

But even at a low level you are wrong. CPI absolutely tracks people buying fewer chicken thighs and more pork. It also tracks people buying less 90% ground beef and more 80% ground beef and other even smaller substitutions:
In 1999, BLS changed the way it calculated the CPI for many of the basic indexes, moving from a Laspeyres formula to a geometric means formula. (A basic index is an index for a particular item category and location; these basic indexes are the building blocks that are aggregated into the broader CPI measures, such as the all items index.) This new formula effectively presumes modest consumer substitution within item categories, correcting for what the Boskin Report termed “lower-level substitution bias.”
Phineas J. Whoopee wrote:
Fri Dec 07, 2018 5:00 pm
adam1712 and others are correct. Inflation is a macroeconomic phenomenon.
Inflation is the measure of the change in price of a basket of goods, along with substitutions in that basket of goods. That's all. You can define the basket of goods as "the things Scooter57 buys". That's why there are different baskets of goods for CPI-U, CPI-W, CPI-E, and various other subpopulations.
Phineas J. Whoopee wrote:
Fri Dec 07, 2018 5:51 pm
Anyone who wants can use a well-established finance term of art to mean their own idiosyncratic definition, but it would be silly to suppose everybody else will understand the non-standard usage, let alone adopt it.
It is not non-standard or idiosyncratic. Here is the Federal Reserve talking about "personal rate of inflation". https://research.stlouisfed.org/publica ... e-average/

And here's the Bureau of Labor Statistics on the same topic:
https://www.bls.gov/cpi/factsheets/aver ... differ.htm
Clearly, as you noted, the weights and items priced are adjusted periodically (every 24 months) based on changes in consumer expenditures. Statistical methods are used to compare apples to apples (as it were) in the month when the expenditures change.

The more complete version of the BLS statement about substitutions is:

“Traditionally, the CPI was considered an upper bound on a cost-of-living index in that the CPI did not reflect the changes in consumption patterns that consumers make in response to changes in relative prices.

Since January 1999, a geometric mean formula has been used to calculate most basic indexes within the CPI; this formula allows for a modest amount of substitution within item categories as relative price changes.

The geometric mean formula, though, does not account for consumer substitution taking place between CPI item categories. For example, pork and beef are two separate CPI item categories. If the price of pork increases while the price of beef does not, consumers might shift away from pork to beef.”

So my discussion of chicken and pork is a valid example. The standard CPI-U isn’t going to reflect that change monthly. The Chained CPI-U was set up to account for substitutions by changing the weights every month.

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Re: What's Your Personal Inflation Rate?

Post by delamer » Fri Dec 07, 2018 11:38 pm

SevenBridgesRoad wrote:
Fri Dec 07, 2018 8:52 pm
But, bring this back to what I think the OP was exploring. (I’m speculating that the title of the post may not be precisely what he was after.)

The standard response to anyone stating they are allocating a large percentage of cash is ‘you’ll lose to inflation...you need more equities because of inflation.’ But if one’s personal purchasing experience is that of no price increases at the personal purchasing level, which several folks here are saying, then does the conventional wisdom hold? It’s an interesting observation.
The OP is talking about controlling his/her expenses through substitutions, low usage of some items (travel), and a certain amount of good luck (like having low medical costs).

That’s budgeting.

But that doesn’t mean over the long term that s/he won’t end up paying more for the specific items purchased.

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Re: What's Your Personal Inflation Rate?

Post by SevenBridgesRoad » Fri Dec 07, 2018 11:43 pm

delamer wrote:
Fri Dec 07, 2018 11:38 pm
SevenBridgesRoad wrote:
Fri Dec 07, 2018 8:52 pm
But, bring this back to what I think the OP was exploring. (I’m speculating that the title of the post may not be precisely what he was after.)

The standard response to anyone stating they are allocating a large percentage of cash is ‘you’ll lose to inflation...you need more equities because of inflation.’ But if one’s personal purchasing experience is that of no price increases at the personal purchasing level, which several folks here are saying, then does the conventional wisdom hold? It’s an interesting observation.
The OP is talking about controlling his/her expenses through substitutions, low usage of some items (travel), and a certain amount of good luck (like having low medical costs).

That’s budgeting.

But that doesn’t mean over the long term that s/he won’t end up paying more for the specific items purchased.
Excellent. Now we are on back on track to discuss the OPs original intent.
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Re: What's Your Personal Inflation Rate?

Post by sperry8 » Sat Dec 08, 2018 8:21 am

I agree with the OP - my personal inflation rate is trending negative. While some things are up (HC premiums & groceries) most for me are down (shopping, insurance, travel (flat), rent, car). Overall the trend is negative over the past 10 years. I suppose that could change if an illness struck - but otherwise, 2% per year inflation hasn't applied to me over the past decade. Like the OP - this has meant I have kept more in cash than I cared to - but didn't worry about it much. It provided me peace of mind post 07/08.
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Re: What's Your Personal Inflation Rate?

Post by PVW » Sat Dec 08, 2018 8:33 am

Phineas J. Whoopee wrote:
Fri Dec 07, 2018 5:51 pm
Anyone who wants can use a well-established finance term of art to mean their own idiosyncratic definition, but it would be silly to suppose everybody else will understand the non-standard usage, let alone adopt it.
PJW
Any mathematical calculation of inflation is idiosyncratic, might as well use one that is relevant to my budget.

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Re: What's Your Personal Inflation Rate?

Post by smitcat » Sat Dec 08, 2018 9:00 am

sperry8 wrote:
Sat Dec 08, 2018 8:21 am
I agree with the OP - my personal inflation rate is trending negative. While some things are up (HC premiums & groceries) most for me are down (shopping, insurance, travel (flat), rent, car). Overall the trend is negative over the past 10 years. I suppose that could change if an illness struck - but otherwise, 2% per year inflation hasn't applied to me over the past decade. Like the OP - this has meant I have kept more in cash than I cared to - but didn't worry about it much. It provided me peace of mind post 07/08.
The ability to control your costs through various methods is to be applauded.
That does not mean that inflation is negative it just means that your ability to replace, reduce or remove an expense has been employed.
If your car costs you less due to less driving, no need of current replacement and less maintenance that would indicate less car consumption.
But at some point you will feel the inflation if you require a car and usage of the sale level as before.
We budget less in some areas for retirement but that does not indicate that inflation does not exist.

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Re: What's Your Personal Inflation Rate?

Post by sperry8 » Sat Dec 08, 2018 11:05 am

smitcat wrote:
Sat Dec 08, 2018 9:00 am
sperry8 wrote:
Sat Dec 08, 2018 8:21 am
I agree with the OP - my personal inflation rate is trending negative. While some things are up (HC premiums & groceries) most for me are down (shopping, insurance, travel (flat), rent, car). Overall the trend is negative over the past 10 years. I suppose that could change if an illness struck - but otherwise, 2% per year inflation hasn't applied to me over the past decade. Like the OP - this has meant I have kept more in cash than I cared to - but didn't worry about it much. It provided me peace of mind post 07/08.
The ability to control your costs through various methods is to be applauded.
That does not mean that inflation is negative it just means that your ability to replace, reduce or remove an expense has been employed.
If your car costs you less due to less driving, no need of current replacement and less maintenance that would indicate less car consumption.
But at some point you will feel the inflation if you require a car and usage of the sale level as before.
We budget less in some areas for retirement but that does not indicate that inflation does not exist.
Agreed. But the OP is specifically asking about "personal" inflation rate. Not overall inflation rate. As such, I described my personal inflation rate which is trending negative to flat over the past decade
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Re: What's Your Personal Inflation Rate?

Post by HEDGEFUNDIE » Sat Dec 08, 2018 11:14 am

Ivy League total cost of attendance (excluding fin aid) has been trending upward at 4%/yr for the past decade. That will probably be the largest contributor to my personal inflation rate going forward. I make sure to account for it in my 529 AA.

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Re: What's Your Personal Inflation Rate?

Post by shokwaverider » Sat Dec 08, 2018 11:47 am

We have tracked this for the last 10 years of Retirement. It is based simply on our total expenses in inflation prone categories, like Food, Utilities, Auto Expenses, etc. So 10 Years ago we spent X and in 2018/19 we spent Y, (Y - X= Z) Z is the amount of increase, and I can honestly say it is around ~1 - ~1.5%.

Typically big consumers have big inflation rates.

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Re: What's Your Personal Inflation Rate?

Post by Smoke » Sat Dec 08, 2018 11:57 am

No Idea, retired 14 yrs. still spending about the same per yr as before retirement. More money coming in than spending :sharebeer

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Re: What's Your Personal Inflation Rate?

Post by JackoC » Sat Dec 08, 2018 11:58 am

Scooter57 wrote:
Fri Dec 07, 2018 11:44 am

There is so much talk about how cash and CDs are a poor investment because they don't keep up with inflation
...
So when I look at all this it seems to me that my personal rate of inflation is, if anything, is trending negative.

If that is the case, there is no reason to avoid cash, is there? If inflation heats up--by which I mean hits 4 or 5% a year and stays there for a year I would reconsider my investments--but if that happened some investments would have to emerge that provide better yield.

They say people are always fighting the last war, and I think that might be what is happening with the whole concept of inflation now.

What is your personal rate of inflation? Are your overall expenditures rising at a rate that matches the official inflation rate?
This seems to me more of a Personal Finance than Investing Theory question, though of course the forum can have whatever topics it wants where ever it wants.

I just mean the assumption that the expected inflation rate and 'riskless' real expected return are directly relevant to asset allocation decisions is questionable IMO. The idea you'd take more risk in stocks just because inflation expectations and/or real expected returns seen in 'riskless' bond rates are low is a false premise. Here it's being posited that you can avoid this by finding that your own 'inflation rate' is lower than CPI inflation. But I don't buy the idea of a connection at all. The most straight forward inference from a basically efficient market is that the drop in expected returns you see in bonds in recent years (to 1% expected real return on long bonds v ~3% historical) also applies to stocks relative to their historical return, more or less. But a lower available return on capital, generally, doesn't definitively imply you should take more or less risk. Your own 'inflation rate' is IMO an even further irrelevancy to whether 'cash and CD's are a poor investment'.

Other posts have mentioned the difficulty in distinguishing 'personal inflation rate' from 'I'm just buying more or fewer goods and services' but I think this is compatible with my point. For whatever combination of reasons (price increases for the same G/S's or we just buy more of them) our spending (in 'every year' categories, too hard to factor in 'once every several year' stuff) has increased 4% pa average over the last ~25yrs. That means we should take more investment risk? But in the last ~5yrs our nominal expenditures have barely increased, so we should now take less investing risk? This doesn't' make any sense to me as a basic concept, and wouldn't make any more if I analyzed closely enough to see what part of the increase, or lack of lately, was due to quantity changes v. price changes in G/S's.

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Re: What's Your Personal Inflation Rate?

Post by Scooter57 » Sat Dec 08, 2018 1:17 pm

This is not a personal finance post because it directly applies to the question of whether people should believe the oft repeated advice that investing in CDs will erode their assets due to inflation.

But people forget that one reason that stocks were a much wiser investment when inflation ran rampant in the late 70s and early 80s was that valuations were very low at the time and dividends much higher. Now dividends are much lower, and valuations closer to a P/E of 15 than 8. The assumption that stocks will preserve your investment from inflation because they did in that earlier inflationary period could be faulty.

Bogle and others have stated that the expected return of the market will be lower than average because of the valuation and low dividend rates. Given a sudden surge in inflation that could make stocks a less likely preservative from erosion.

For those of you with modest portfolios early in your careers this is no big deal, but for people close to retirement with portfolios large enough to provide a comfortable old age it is.

I have spent much of my professional career investigating things "everyone" knows to be true and discovering how weak the evidence is for many of them--if there is any valid evidence at all. Too often elaborate structures are built on a single faulty premise that has been repeated so often no one ever checks to see where it came from.

So I think it is gal d to reexamine the inflation-related wisdom that emerged from the last 50 years.

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Re: What's Your Personal Inflation Rate?

Post by Scooter57 » Sat Dec 08, 2018 1:22 pm

This is not a personal finance post because it directly applies to the question of whether people should believe the oft repeated advice that investing in CDs will erode their assets due to inflation.

But people forget that one reason that stocks were a much wiser investment when inflation ran rampant in the late 70s and early 80s was that valuations were very low at the time and dividends much higher. Now dividends are much lower, and valuations closer to a P/E of 15 than 8. The assumption that stocks will preserve your investment from inflation because they did in that earlier inflationary period could be faulty.

Bogle and others have stated that the expected return of the market will be lower than average because of the valuation and low dividend rates. Given a sudden surge in inflation that could make stocks a less likely preservative from erosion.

For those of you with modest portfolios early in your careers this is no big deal, but for people close to retirement with portfolios large enough to provide a comfortable old age it is.

I have spent much of my professional career investigating things "everyone" knows to be true and discovering how weak the evidence is for many of them--if there is any valid evidence at all. Too often elaborate structures are built on a single faulty premise that has been repeated so often no one ever checks to see where it came from.

So I think it is valid to reexamine the inflation-related wisdom that emerged from the last 50 years. We didn't need to look at government figures to know inflation was eating away our buying power in 1980. Whether it was 16% or 18% was irrelevant. Itvwas a huge threat. But when the question is whether it is 2% or 0% the situation is very different.

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Re: What's Your Personal Inflation Rate?

Post by Tdubs » Sat Dec 08, 2018 1:24 pm

shokwaverider wrote:
Sat Dec 08, 2018 11:47 am
We have tracked this for the last 10 years of Retirement. It is based simply on our total expenses in inflation prone categories, like Food, Utilities, Auto Expenses, etc. So 10 Years ago we spent X and in 2018/19 we spent Y, (Y - X= Z) Z is the amount of increase, and I can honestly say it is around ~1 - ~1.5%.

Typically big consumers have big inflation rates.
At last, someone who answered the question.

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Re: What's Your Personal Inflation Rate?

Post by 2015 » Sat Dec 08, 2018 11:31 pm

shokwaverider wrote:
Sat Dec 08, 2018 11:47 am
We have tracked this for the last 10 years of Retirement. It is based simply on our total expenses in inflation prone categories, like Food, Utilities, Auto Expenses, etc. So 10 Years ago we spent X and in 2018/19 we spent Y, (Y - X= Z) Z is the amount of increase, and I can honestly say it is around ~1 - ~1.5%.

Typically big consumers have big inflation rates.
Which why at the moment it feels like I'm experiencing hyper-inflation as compared to my past spending habits. In retirement, my "inflation rate" has ranged from deflation to planned inflation currently based on a change in my circumstances.

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Re: What's Your Personal Inflation Rate?

Post by randomguy » Sun Dec 09, 2018 12:17 am

KlangFool wrote:
Fri Dec 07, 2018 5:04 pm
OP,

My household annual expense stays about the same for the last 10 years. So, the answer is 0% for me.

KlangFool
I thought your expenses doubled lately since in other posts you have talked about having a 0% savings rate these days as you are spending money on college? Good news is you will have a big period of deflation in a couple of years:)

My person inflation rate has been about 50% over the past 15 years for the definition of "inflation" that we are using. Obviously that number tells you absolutely nothing other than the goods I am buying are different (i.e 10/month employer insurance to 800/month private plan . 0 dollar kid expenses to 60k for a couple of easy ones.)

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Re: What's Your Personal Inflation Rate?

Post by WanderingDoc » Sun Dec 09, 2018 12:35 am

AlohaJoe wrote:
Fri Dec 07, 2018 8:16 pm
delamer wrote:
Fri Dec 07, 2018 3:59 pm
Inflation, as measured by the CPI, measures the change in prices of a fixed set of items. So if chicken thighs are one of the items and the price of chicken thighs goes up, it will cause an increase in the index.

Your substitution of pork chops for chicken thighs isn’t reflected in the CPI changes. That’s a change in expenditures, not inflation.
This is wrong. The basket of goods changes. Obviously, right? We've been measuring inflation since 1913. No one really thinks that today we use the same basket of goods as was used in 1913. So everyone obviously is in agreement at a high level that substitution happens and that CPI tracks that substitution.

But even at a low level you are wrong. CPI absolutely tracks people buying fewer chicken thighs and more pork. It also tracks people buying less 90% ground beef and more 80% ground beef and other even smaller substitutions:
In 1999, BLS changed the way it calculated the CPI for many of the basic indexes, moving from a Laspeyres formula to a geometric means formula. (A basic index is an index for a particular item category and location; these basic indexes are the building blocks that are aggregated into the broader CPI measures, such as the all items index.) This new formula effectively presumes modest consumer substitution within item categories, correcting for what the Boskin Report termed “lower-level substitution bias.”
Phineas J. Whoopee wrote:
Fri Dec 07, 2018 5:00 pm
adam1712 and others are correct. Inflation is a macroeconomic phenomenon.
Inflation is the measure of the change in price of a basket of goods, along with substitutions in that basket of goods. That's all. You can define the basket of goods as "the things Scooter57 buys". That's why there are different baskets of goods for CPI-U, CPI-W, CPI-E, and various other subpopulations.
Phineas J. Whoopee wrote:
Fri Dec 07, 2018 5:51 pm
Anyone who wants can use a well-established finance term of art to mean their own idiosyncratic definition, but it would be silly to suppose everybody else will understand the non-standard usage, let alone adopt it.
It is not non-standard or idiosyncratic. Here is the Federal Reserve talking about "personal rate of inflation". https://research.stlouisfed.org/publica ... e-average/

And here's the Bureau of Labor Statistics on the same topic:
https://www.bls.gov/cpi/factsheets/aver ... differ.htm
I love you AlohaJoe, but that is not what inflation is. Inflation is an increase in the supply of money. What you wrote is merely a (possible) consequence of inflation, but its not the definition of inflation.
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