Guidance

RESOURCES TO HELP SHAPE YOUR FINANCIAL FUTURE

What will inflation be in coming years? The real answer is that it varies according to your age and spending patterns. Inflation wallops someone with kids in college, and is hardly noticeable to stay-at-home types. Another consideration: Do you buy more goods (whose prices are going down) than services (going up, mostly).

Inflation is 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 amount 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, which rise with the index, 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. As the population of 18-year-olds declines, however, we see an ebbing of college 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, yet 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, although others we must accept. People planning to retire commonly ask how to calculate the future rate of inflation. Projecting what price increases lie ahead is central to anticipating annual income needs. Sadly, there is no magic number. For many, 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. Travel expenses tend to increase in the early years of retirement and slow later on as people take fewer trips.

On the other hand, if you are a homebody who does your own yardwork and property improvements, then you will likely encounter lower inflation levels relative to your traveling friends. The key point is that your personal inflation rate is unique based on your age and your lifestyle. The headline CPI number is important only 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.

 

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