Bogleheads.org

I know that inflation can vary area from area, but is it practically possible for an investor to be more impacted by inflation/deflation than what the CPI would reflect over a long timeframe of say 30 years (in other words, the investor is high-beta with inflation)? If so, what is the proper correction to hedge out that risk (TIPS work partly, but I am thinking in the case that TIPS underestimates the impact either way)?

Land rental values directly impact CPI in the form of rent or owner's imputed rent. To a lesser extent, land rental values also affect the cost of goods and services since businesses pay rent and their workers have to pay rent to live somewhere. Hence, if land rental values accelerate in a particular locale faster than the economy-wide average, the cost of living in the locale will increase faster than CPI. This might be the most prototypical "high beta" CPI item since the factors that lead to higher inflation (like more money velocity, factor utilization, lower interest, higher money quantity) also directly lead to higher real estate values in hot areas. Ideally, if the household's labor income has moderate-to-fair bargaining power, then the household will not fall behind, but this factor will not benefit the retiree. The key hedge is homeownership, which places the household in the position of both benefiting from land rental values (as the owner) and paying the expense of living somewhere (as the renter). Homeownership in retirement would therefore be a desirable hedge.

You could imagine a variety of other possibilities. If medical costs rise faster than CPI, then people with more medical costs would have higher inflation than CPI. This could happen because the household is in a state where group or statewide cohort insurance pricing is based on a very poor health cohort, or it could be because a household member has a chronic medical condition and therefore either buys more premium health insurance or more regularly has to pay the full deductible and into coinsurance. Hedging this exposure financially depends on the source of the acceleration--if it's a doctor shortage, then having a family member enter the medical industry is one idea. If it's bigger margins to insurance companies, then buying health insurer stock could help.

If one lives in the suburbs, one is impacted more by vehicle-related costs. If one has a computer gadget hobby, then higher semiconductor costs bite. And so on. But these start becoming lower magnitude items.

I think that the first step would be to identify the particular CPI component(s) that is(are) or will be out-of-step with your personal inflation experience.

Only after identifying that can you realistically formulate a strategy to combat it.

I suspect, but don’t know for sure and am too lazy to try to gather data and math it out, that the biggest contributor to whether someone is high or low beta with respect to inflation would be whether or not they already own their own home, either outright or with a fixed rate mortgage.

I know for certain that owning the same home for the last 25 years has protected me personally from the housing inflation that has been rampant in my location. During that period, housing, and everything that goes with it, went from being our largest expense to #3, after healthcare and travel. People who rent in my area would have had the opposite experience.

I think it’s actually very common but we don’t think of it that way. If they buy a house, it becomes an advantage and the people in question will simply move to an area where they can have the lifestyle they want. The disproportionate inflation becomes advantageous. It can be a disadvantage if you do that in reverse. If you want to retire and live, say, in a mansion in the Napa Valley then it’s really not about adjustment, tips, and hedging. It takes real in depth strategy to be that wealthy. If you rent, then the disproportionate inflation can’t really help you, but your wages should react accordingly and that does help you. A person can only generalize weakly about wages.

secondopinion wrote: ↑Fri Jan 20, 2023 4:57 pmI know that inflation can vary area from area, but is it practically possible for an investor to be more impacted by inflation/deflation than what the CPI would reflect over a long timeframe of say 30 years (in other words, the investor is high-beta with inflation)? If so, what is the proper correction to hedge out that risk (TIPS work partly, but I am thinking in the case that TIPS underestimates the impact either way)?

The majority of us have the lion's share of our annual expenses going to the big 4:

housing
transportation
taxes
food

So it makes the most sense to focus on the big four before moving into the next tier of expenses. Beyond investments that have the potential grounding to keep pace with inflation so our future consumption will be able to fall in line, one can hedge with their current budget as well to cut costs and battle rising costs in the here and now.

You mention the reality that the inflation for some of those items does vary from area to area such as the difference between living in a HCOL ----> MCOL ---> LCOL area.

Beyond that, it would appear one could hedge each specific expense in the here and now by trimming the costs and choosing wisely.

Transportation costs could be cut such as choosing a higher MPG car or EV, getting a discount on insurance by having a beacon in your car and the app that reports your driving to the insurance company to qualify for the safe driver discount, burning the cheaper fuel, driving the speed limit to increase your mileage, combining errands on one trip rather than making multiple trips, etc... when it comes to transportation.

Housing expenses one could hedge is living in a lower property tax area, doing a lot of DIY maintenance, not overpaying for insurance, save on utilities by keeping temperature cooler in Fall/Winter and warmer in Spring/Summer, short showers, avoid watering the lawn, shovel rather than owning and running a snow blower, push behind mower rather than an expensive lawn tractor, etc... for the housing.

Hedging taxes as much as possible by deferring taxes with employment based retirement plans, getting some money in Roth plans to lower future tax costs, lower property tax areas and specific property choice based on the taxes (as mentioned above in housing), TLH and TGH along the way to mitigate future taxes, and a myriad of tax strategies to keep costs lower over time both in the here and now and for the future.

Hedging inflation in the here and now for food includes packing your own lunch and bringing to work during your working years, choosing lower cost proteins at the butcher shop, buying in bulk, cooking your own meals rather than eating out, avoiding the higher cost processed foods, purchasing store brands over name brands, taking advantage of sales when they come along, growing some of your own food in a garden, consider using the tactic of bartering for some of your food sources, and being careful not to overeat on the amount of calories per day (in other words, don't waste money that just goes to your waist ).

Budget now and budget for the future as a combination strategy to battle the costs and inflation.

CyclingDuo

Personal situations vary tremendously.

In my case, bucket-of-goods inflation is probably less pertinent than anticipated lifestyle changes.

Housing - currently own winter and summer residences. At some point in the future will definitely resort to one, say, at age 75 in ~12 years. At that time will likely get large cash lump, and drop second set of expenses (taxes, utilities, upkeep, etc)

Travel - as relatively recent retirees we travel whenever we choose. Having observed my parents age, again, I expect that will decrease over the years, particularly past age 75-80.

Boat - $12Kish yearly expense - put-in, slip, fuel, haulout, winterize, repeat + occasional extra upkeep. Again, likely won't have that expense post 75-80.

Bottom line, we have significant current expenses that will tend to dramatically decrease if our retirement exceeds 18-20 years, and are available to be truncated sooner if we were financially strapped. Good problems to have, but shows that bucket-of-goods inflation likely a secondary factor vs. expected lifestyle evolution.

I think that inflation as far as retirement is concerned might be best expressed as a personal thing. You may wish to track your personal rate of inflation ... keep a budget or ledger if you will. You might want to use that data to deduce an adjustment to the CPI. A personal core rate if you will. I have been thinking about this myself too. It strikes me that a personal rate might be more useful that THE CPI. My retirement investments are centric to my needs and inflation is a component of it. Maybe a personal rate makes sense for retirement, for me that is.