Inflation - something to worry about?

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Wrench
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Inflation - something to worry about?

Post by Wrench »

The Minneapolis Fed has tabulated U.S. inflation rates from 1801 to the present:
https://www.minneapolisfed.org/about-us ... ndex-1800-
I have plotted 20 year rolling averages for each year from 1820 to 2019, together with a linear regression:
Image

So, for those of us with 20-30 more years on this earth, what does this plot tell us, if anything?
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JoeRetire
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Re: Inflation - something to worry about?

Post by JoeRetire »

Past performance is not a guarantee of future returns.

The graph tells us nothing predictive. Nothing.

Will there be significant inflation at some point? Definitely. Do we know when? No.
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Watty
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Re: Inflation - something to worry about?

Post by Watty »

Wrench wrote: Wed Aug 05, 2020 4:42 pm So, for those of us with 20-30 more years on this earth, what does this plot tell us, if anything?
Not to look at a 20 years average???

Try looking at the same data with a 3 year average.
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Re: Inflation - something to worry about?

Post by alex_686 »

Not much. The nature of money, and thus inflation, have changed dramatically over that time period.

At the start we have a agrarian barter economy where money is tied to gold and there is no central bank.

At the end most of the money circulating is created by shadow banks.
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Re: Inflation - something to worry about?

Post by 000 »

Yes, I think so if you have large holdings in a fiat currency.
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Re: Inflation - something to worry about?

Post by flaccidsteele »

Wrench wrote: Wed Aug 05, 2020 4:42 pm So, for those of us with 20-30 more years on this earth, what does this plot tell us, if anything?
Nothing

As long as I’m invested in productive assets, inflation is irrelevant
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Re: Inflation - something to worry about?

Post by nisiprius »

Be aware that boxcar moving averages actually manufacture cycles out of random data. It is exactly akin to holding a conch shell up to your ear and "hearing the sound of the ocean." The conch shell is an imperfect resonator, and it strengthens some frequencies and attenuates others. The result is that the random ambient white noise of your surrounding has its spectrum altered enough so it sounds different, and it is easy to imagine that it is "the sound of the ocean."

If you average over twenty years, and something is happening with a period of exactly five years, then it will not show up in the moving average at all, because every twenty year period will include exactly four crest and four troughs--the missing bit at one end will be exactly filled in by an extra bit at the other end. It will be invisible.

But if something is happen with a period of exactly 4.445 years, that is to say 40/9 years, a 20 year period will contain 4.5 cycles = 9 half-cycles, and it will show up in a moving average because some 20-year windows will contain 5 crests and 4 troughs, while others will contain 4 crests and 5 troughs.

In reality, real data consists of a mixture of frequencies which are hard to pick out by eye. When you run it through a boxcar moving average, some frequencies will be amplified and some attenuated--the five-year cycles will be completely attenuated, the 4.445-year cycles will be amplified--and you will end up with a curve that is still irregular but which now tends to contain regularities that are artifacts of the moving average process.
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Re: Inflation - something to worry about?

Post by heyyou »

Having the expectation of adapting to major changes, reduces the worry about future economic situations.
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Re: Inflation - something to worry about?

Post by jimkinny »

Here is a short article by Tim Duy writing in Bloomberg about how the Fed may end up dealing with inflation if we experience it in the future.

[https://www.bloomberg.com/opinion/artic ... s-too-late][/url]
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Wrench
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Re: Inflation - something to worry about?

Post by Wrench »

nisiprius wrote: Wed Aug 05, 2020 8:34 pm Be aware that boxcar moving averages actually manufacture cycles out of random data. It is exactly akin to holding a conch shell up to your ear and "hearing the sound of the ocean." The conch shell is an imperfect resonator, and it strengthens some frequencies and attenuates others. The result is that the random ambient white noise of your surrounding has its spectrum altered enough so it sounds different, and it is easy to imagine that it is "the sound of the ocean."

If you average over twenty years, and something is happening with a period of exactly five years, then it will not show up in the moving average at all, because every twenty year period will include exactly four crest and four troughs--the missing bit at one end will be exactly filled in by an extra bit at the other end. It will be invisible.

But if something is happen with a period of exactly 4.445 years, that is to say 40/9 years, a 20 year period will contain 4.5 cycles = 9 half-cycles, and it will show up in a moving average because some 20-year windows will contain 5 crests and 4 troughs, while others will contain 4 crests and 5 troughs.

In reality, real data consists of a mixture of frequencies which are hard to pick out by eye. When you run it through a boxcar moving average, some frequencies will be amplified and some attenuated--the five-year cycles will be completely attenuated, the 4.445-year cycles will be amplified--and you will end up with a curve that is still irregular but which now tends to contain regularities that are artifacts of the moving average process.
Thanks nisi - as usual, you have most insightful comments. So how should one look at the data, or is it a fool's errand to even try as many of the other respondents seem to suggest? It is certainly true the world today is vastly different than 200 years ago so it is unclear that data from the 1800s and early 1900s is at all relevant. On the other hand, I don't believe human behavior that is one of the roots causes for inflation has changed that much over the last 200 years. I'm just trying to get some insights into of how worried a near-retired old coot like me should be concerned about inflation in his later years. :happy
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Re: Inflation - something to worry about?

Post by JPH »

No, the graph does not permit you to predict the future, but you don't need to. It tells you that there has been inflation for a very long time, and there likely will be inflation in the future. That's all you need to know. Knowing that, are you the kind that would be comfortable just riding out the cycles? I have a significant proportion of my bonds in a TIPS fund, but I have no idea if that choice will be the right one going forward.
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Re: Inflation - something to worry about?

Post by vineviz »

Wrench wrote: Thu Aug 06, 2020 6:40 am I'm just trying to get some insights into of how worried a near-retired old coot like me should be concerned about inflation in his later years. :happy
The two questions I think are likely to give you some insight here are these:

1) What percentage of your basic living expenses do you expect to be covered by Social Security or CPI-linked pension income?.
2) What percentage of your portfolio is invested in assets that move with inflation?

By basic living expenses I mean things you really can't live without: food, shelter, clothing, health care, taxes. The Living Wage Calculator can give you a reasonable estimate of this number for your area if you don't have good personal data. If Social Security and/or a CPI-linked pension covers most or all of these expenses, a near-retired old coot should probably not worry much about inflation.

If Social Security and/or a CPI-linked pension do NOT cover most or all of your basic living expenses then question number 2 becomes more important. In this case, most or all of your portfolio should be invested in assets that move with inflation. TIPS and Series I savings bonds are the most powerful such assets, but a globally diversified portfolio of stocks is typically considered to be in this group as well. Direct investment in real estate would help (though some would say this is part side-hustle and part illiquid investment).

Does your portfolio contain more than 50% stocks, with a solid allocation to international stocks? If not, a near-retired old coot might consider TIPS or Series I savings bonds for a solid chunk of your bond allocation.
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Re: Inflation - something to worry about?

Post by JoMoney »

I've been worried about inflation a long time. The past 20 years had much lower inflation than I could have imagined.
I "see" the same cycle patterns in the past data as others, and I know that's not necessarily predictive... but I still wory.
Anecdotally, despite the publicized economic issues, in the circles I run in people have seen big inflation in their assets (homes/retirement accounts), and quite a number of people I know, including myself after a job change, have seen unexpected wage increases. Some of them even getting government CARES bonuses on top of their wages. I feel like we're on the verge of seeing quite a bit of inflation, but my feelings have been wrong before. Very difficult to discern which comes first, whether I'm picking from an infinite amount of facts to build a rational story that suits my feelings, or if the 'facts' that I'm experiencing are what's causing the feeling.
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Re: Inflation - something to worry about?

Post by Valuethinker »

JoMoney wrote: Thu Aug 06, 2020 8:17 am I've been worried about inflation a long time. The past 20 years had much lower inflation than I could have imagined.
I "see" the same cycle patterns in the past data as others, and I know that's not necessarily predictive... but I still wory.
Anecdotally, despite the publicized economic issues, in the circles I run in people have seen big inflation in their assets (homes/retirement accounts), and quite a number of people I know, including myself after a job change, have seen unexpected wage increases. Some of them even getting government CARES bonuses on top of their wages. I feel like we're on the verge of seeing quite a bit of inflation, but my feelings have been wrong before. Very difficult to discern which comes first, whether I'm picking from an infinite amount of facts to build a rational story that suits my feelings, or if the 'facts' that I'm experiencing are what's causing the feeling.
I experience it totally differently. Partly perhaps due to being in the UK.

I see zero incentive to spend money - it's unsafe out there. Going to restaurants, travelling by Tube (subway) etc. What if you catch Covid-19 from your kids when the schools reopen in September?

Rising stock portfolios are essentially irrelevant to most people. Even if they have a pension which is stock market linked, they are only dimly aware of it. House prices have gone up as for 4 months almost no houses were sold - if you couldn't view, how could you buy? So there definitely is a catch up effect as houses sell in days at asking prices. People do notice that.

Businesses on our High Street are near implosion - many may never reopen. Right now they are struggling to work with only 2 customers in the store, etc. The newspapers are nothing but major layoffs announced, and not only retailers.

Furlough has 9m workers on it, being paid 80% of their old salaries, to a max of £2500 pcm - and that will be all ended by the end of October. Many employers will just make them redundant. Universal Credit (what you get if you don't have a job) is only a bit over £1000 pcm.

Prices probably have gone up on necessities. There are certainly fewer multi-buy bargains, etc, around. But, conversely, non-essentials like foreign travel, restaurants etc are just off the table. You might go to Europe and be quarantined for 2 weeks upon your return.

It feels like a Depression to me, not just a Recession. Worse, in fact, that spring 2009 did.
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Wrench
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Re: Inflation - something to worry about?

Post by Wrench »

vineviz wrote: Thu Aug 06, 2020 7:40 am
Wrench wrote: Thu Aug 06, 2020 6:40 am I'm just trying to get some insights into of how worried a near-retired old coot like me should be concerned about inflation in his later years. :happy
The two questions I think are likely to give you some insight here are these:

1) What percentage of your basic living expenses do you expect to be covered by Social Security or CPI-linked pension income?.
2) What percentage of your portfolio is invested in assets that move with inflation?

By basic living expenses I mean things you really can't live without: food, shelter, clothing, health care, taxes. The Living Wage Calculator can give you a reasonable estimate of this number for your area if you don't have good personal data. If Social Security and/or a CPI-linked pension covers most or all of these expenses, a near-retired old coot should probably not worry much about inflation.

If Social Security and/or a CPI-linked pension do NOT cover most or all of your basic living expenses then question number 2 becomes more important. In this case, most or all of your portfolio should be invested in assets that move with inflation. TIPS and Series I savings bonds are the most powerful such assets, but a globally diversified portfolio of stocks is typically considered to be in this group as well. Direct investment in real estate would help (though some would say this is part side-hustle and part illiquid investment).

Does your portfolio contain more than 50% stocks, with a solid allocation to international stocks? If not, a near-retired old coot might consider TIPS or Series I savings bonds for a solid chunk of your bond allocation.
Vineviz - Thanks for the advice. I am on the "worried about Inflation" bus so much that all my friends and family roll their eyes when they hear me mention inflation! As a result, I probably have over committed to inflation adjusted investments. I am well covered for basic living expenses plus an ~20% buffer that will cover non-necessities like travel, gifts for the kids, etc. In addition to SS (@70), I hold an inflation indexed annuity that also starts @70 (I think I may have gotten one of the last ones The Principal sold last year!), a TIPS ladder that covers age ~80 to 95, and iBonds that will cover another ~10 years. I have a substantial stock portfolio beyond that. I have no debt. So intellectually I KNOW we will be fine, but maybe because I have spent so much time planning for inflation, I still like to consider if/how/when it might rear its ugly head.
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Re: Inflation - something to worry about?

Post by vineviz »

Wrench wrote: Thu Aug 06, 2020 2:22 pm So intellectually I KNOW we will be fine, but maybe because I have spent so much time planning for inflation, I still like to consider if/how/when it might rear its ugly head.
For your sake I'll be cheering for a couple years of 5%+ inflation, so you don't feel like all your effort was in vain. ;)
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Re: Inflation - something to worry about?

Post by bmelikia »

JoeRetire wrote: Wed Aug 05, 2020 5:57 pm Will there be significant inflation at some point? Definitely. Do we know when? No.
The above statement is not an absolute fact
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Re: Inflation - something to worry about?

Post by vineviz »

bmelikia wrote: Thu Aug 06, 2020 2:42 pm
JoeRetire wrote: Wed Aug 05, 2020 5:57 pm Will there be significant inflation at some point? Definitely. Do we know when? No.
The above statement is not an absolute fact
The quoted text contains two statements: which one is suspect in your view?
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Inflation - something to worry about?

Post by Oicuryy »

Here is another view of that Minneapolis Fed data.

Image

The blue line is the natural logarithm of the price level. The green line is the log of the trailing 20-year average of the price level.

Plotting the log makes the vertical distance on the chart proportional to the percent change in the price level. The vertical distance moved in a given time period represents the inflation rate over that period. On this graph the distance between grid lines represents a doubling or halving of the price level. The slope of the curve indicates the rate of change in the inflation rate.

The red bars show the compound annual growth rate for each 20-year period. It is the constant rate that would have taken the price level at the beginning of the period to the price level at the end.

I would not expect a return to the bursts of inflation and long stretches of deflation that occurred before 1933 when U.S. dollars were redeemable for gold. I would also not expect a repeat of the very loose monetary policy of the 1970s. That effort to use high inflation to raise employment did not work.

My guess for the future, shown by the dashed lines, is a leveling off of the downward trend in inflation rates that has been occurring over the last forty years. But don't bet your retirement on the random musings of some anonymous poster on the internet.

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Re: Inflation - something to worry about?

Post by Angst »

Oicuryy wrote: Thu Aug 06, 2020 3:58 pm Here is another view of that Minneapolis Fed data.

[Snip...]
That's really interesting, thank you for the work. It gets me thinking of course: If the Fed is successful in targeting (average) inflation at 2% over time, the future (dotted) slope of the price level should flatten out. Correct? But then, wouldn't that bode poorly for the extrapolation of future CAGR?
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Re: Inflation - something to worry about?

Post by Wrench »

Ron - perfect - far superior to my plot. Thank you. Of course it does not really help predict the future. But it does show the historical data in a much more illustrative fashion, and even allow as you show some rational projection of what could happen.

I am struck by how different the 1800s were than today. Imagine living your whole adult life where what cost a nickel when you were a young man/woman cost a nickel or so when you took your last breath! Certainly everyone understands that the world was a very different place then, with the US being primarily an agrarian economy. But, I never saw or realized the economic/financial implications related to prices. Makes me wonder what the 22nd or 23rd century BHs will say about the time we are in now! :happy
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Re: Inflation - something to worry about?

Post by bmelikia »

vineviz wrote: Thu Aug 06, 2020 2:56 pm
bmelikia wrote: Thu Aug 06, 2020 2:42 pm
JoeRetire wrote: Wed Aug 05, 2020 5:57 pm Will there be significant inflation at some point? Definitely. Do we know when? No.
The above statement is not an absolute fact
The quoted text contains two statements: which one is suspect in your view?
The "definitely" comment in response to the first question.
"I would rather die with money, than live without it...." - Bogleheads member Ron | | "The greatest enemy of a good plan, is the dream of a perfect plan." | -Bogle
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Re: Inflation - something to worry about?

Post by vineviz »

bmelikia wrote: Thu Aug 06, 2020 4:53 pm
vineviz wrote: Thu Aug 06, 2020 2:56 pm
bmelikia wrote: Thu Aug 06, 2020 2:42 pm
JoeRetire wrote: Wed Aug 05, 2020 5:57 pm Will there be significant inflation at some point? Definitely. Do we know when? No.
The above statement is not an absolute fact
The quoted text contains two statements: which one is suspect in your view?
The "definitely" comment in response to the first question.
Hmmm. I’m not in the camp that expects runaway inflation anytime soon, but don’t you think it’d be incredibly naive to imagine that significant inflation will NEVER appear?
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Inflation - something to worry about?

Post by alex_686 »

Wrench wrote: Thu Aug 06, 2020 4:45 pm I am struck by how different the 1800s were than today. Imagine living your whole adult life where what cost a nickel when you were a young man/woman cost a nickel or so when you took your last breath!
I have the opposite view.

There were bouts of deflation during that period. You could earn a decent rate of return just by sitting on your wealth without risk or hazard.

This is great if you are one of the ‘haves’. If you were one of the ‘have nots’ well...even if you had talent and energy it would have been a uphill battle.
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Re: Inflation - something to worry about?

Post by bmelikia »

vineviz wrote: Thu Aug 06, 2020 4:58 pm
bmelikia wrote: Thu Aug 06, 2020 4:53 pm
vineviz wrote: Thu Aug 06, 2020 2:56 pm
bmelikia wrote: Thu Aug 06, 2020 2:42 pm
JoeRetire wrote: Wed Aug 05, 2020 5:57 pm Will there be significant inflation at some point? Definitely. Do we know when? No.
The above statement is not an absolute fact
The quoted text contains two statements: which one is suspect in your view?
The "definitely" comment in response to the first question.
Hmmm. I’m not in the camp that expects runaway inflation anytime soon, but don’t you think it’d be incredibly naive to imagine that significant inflation will NEVER appear?
It's not really something that bothers me
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Re: Inflation - something to worry about?

Post by JackoC »

Wrench wrote: Wed Aug 05, 2020 4:42 pm The Minneapolis Fed has tabulated U.S. inflation rates from 1801 to the present:
https://www.minneapolisfed.org/about-us ... ndex-1800-
I have plotted 20 year rolling averages for each year from 1820 to 2019, together with a linear regression:
Image

So, for those of us with 20-30 more years on this earth, what does this plot tell us, if anything?
As other posts noted, rolling averages are a plain statistically wrong way to look at past history, no matter how common the practice is. It's usually fueled by the need to somehow manufacture more than a very few *independent* 20 or 30 yr period samples, like in say 100 yrs history of perhaps reasonably comparable US stock returns. It's hard for some to accept all we have is 3 independent 30 yr trials, a very small sample. But that's reality. Manufacturing more by using auto-correlated overlapping periods is junk statistics.

Expanding the data set back to 1820 gives more fairly long periods. But the problem in case of monetary history/inflation is that the monetary system was basically different prior to the establishment of the Federal Reserve in 1913, and not really the same as now for some time after that. In 1820-1913 the general price level in the US fell around 15% cumulatively. That could conceivably happen in the next 93 yrs, almost anything is possible, but if so would be a completely different kind of event. In 1820-1913 the system had a default expectation of a roughly constant price level indefinitely*. According to Fed inflation goal now the price level should rise ~6 fold in 2020-2113 (1.02^93). The Fed would have to drastically fail in its policy or else the system completely change again for the price level to fall cumulatively over that long a period. Not that the 1913-2020 inflation has necessarily strong predictive value, but pre-1913 and now are as 'apples v oranges' as can be wrt inflation.

*In practice there were periods of rapid price level increase often associated with wars, and often deflation otherwise. ~75% increase from start of the Constitutional govt in US (and French Revolution) in 1789 till the end of the Napoleonic Wars in 1815, 46% drop from 1815 to 1860, +96% Civil War yrs, -39% to 1913. +~2500% since 1913.
https://www.officialdata.org/us/inflati ... amount=100
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Re: Inflation - something to worry about?

Post by JoeRetire »

bmelikia wrote: Thu Aug 06, 2020 4:53 pm
vineviz wrote: Thu Aug 06, 2020 2:56 pm
bmelikia wrote: Thu Aug 06, 2020 2:42 pm
JoeRetire wrote: Wed Aug 05, 2020 5:57 pm Will there be significant inflation at some point? Definitely. Do we know when? No.
The above statement is not an absolute fact
The quoted text contains two statements: which one is suspect in your view?
The "definitely" comment in response to the first question.
You don't think there will ever be significant inflation? Remember - ever is a long time...

I'm confident in my statement though I'm not confident I'll be alive when it happens. Perhaps we'll need to agree to disagree.
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.
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