Author Topic: Inflation Formula(s)?  (Read 1731 times)

OWHL

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Inflation Formula(s)?
« on: April 08, 2013, 03:48:18 PM »
How would I go about getting the amount of money I lose every year from inflation?

Right now I figured it would be:

Income-Expenses= Net Worth
Income * inflation= Amount lost to inflation
ALI- Net worth= Assets

Am I on the right track?
A person who says it cannot be done must not interrupt the person already doing it.

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matchewed

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Re: Inflation Formula(s)?
« Reply #1 on: April 08, 2013, 03:54:33 PM »
First your net worth would be -

Assets - Debts=Net Worth

I personally don't worry about inflation in that way. I use inflation on my future expense side more than anything. As in expenses going up 1.5% per year or so.

If you are calculating things out right now as a snapshot then inflation doesn't really matter. Inflation is a future calculation factor, or at least that's my take on it.

OWHL

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Re: Inflation Formula(s)?
« Reply #2 on: April 08, 2013, 03:57:27 PM »
Well, if my expenses go up x% in future years, that decreases my net worth, right?

My intention is to figure out if my yearly gains are beating inflation changes, which I figured doing the equations in OP would get me there.
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matchewed

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Re: Inflation Formula(s)?
« Reply #3 on: April 08, 2013, 03:59:39 PM »
Hmmm you're wondering if your yield is beating inflation.

That's a bit easier. Calculate your yield in a percentage format. Take that and subtract annual inflation for that year.

chucklesmcgee

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Re: Inflation Formula(s)?
« Reply #4 on: April 08, 2013, 04:03:56 PM »
You don't lose money to inflation the way you lose money to ordinary expenses. If you have say, $50,000 at the start of the year in a checking account, you'll still have $50,000 at the end. The nominal value of the money hasn't changed (it's still $50,000) but the real value has ($50,000 buys less).

Not quite sure what your formulas are supposed to mean.

Why don't you play with this inflation calculator and see if it answers your question.

http://www.bls.gov/data/inflation_calculator.htm

chucklesmcgee

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Re: Inflation Formula(s)?
« Reply #5 on: April 08, 2013, 04:05:37 PM »
Well, if my expenses go up x% in future years, that decreases my net worth, right?

It doesn't decrease your nominal net worth.

StarswirlTheMustached

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Re: Inflation Formula(s)?
« Reply #6 on: April 08, 2013, 05:49:46 PM »
Hmmm you're wondering if your yield is beating inflation.

That's a bit easier. Calculate your yield in a percentage format. Take that and subtract annual inflation for that year.
Does anyone have a more useful value than the government numbers? As I understand it, the standard inflation numbers fail to include food, fuel, and medical expenses. You know, the things with the lowest price flexibility.

matchewed

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Re: Inflation Formula(s)?
« Reply #7 on: April 08, 2013, 06:09:48 PM »
http://www.bls.gov/opub/hom/pdf/homch17.pdf

Specifically pg. 13 where it lists the items calculated to get the CPI.

1. Food at homeŚnonmeat staples
2. Food at homeŚmeat, poultry, fish
3. Food at homeŚfruits and vegetables
4. Other food at home, plus beverages (alcoholic and
nonalcoholic)
5. Food away from home
6. Fuels and utilities
7. Household furnishings and operations
8. Apparel and upkeep
9. Transportation less motor fuel
10. Motor fuel
11. Medical care
12. Education and communication
13. Recreation and other commodities and services

There may be some adjusted CPI #'s you may be referring to. I'd take a glance around bls.gov to familiarize yourself with what our government does, their methodology, and what these numbers mean.

*Edit* Sorry for the USA centrism on this one. I don't know off hand any global calculations for inflation, nor how practical they'd be for any single person's living situation. For that matter a CPI for all of the USA would probably be entirely impractical for an individual as well. :)

To go further with that idea you can also just track your expenses and come up with a personal inflation rate by comparing your costs from year to year.
« Last Edit: April 08, 2013, 06:12:34 PM by matchewed »

grantmeaname

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Re: Inflation Formula(s)?
« Reply #8 on: April 08, 2013, 06:14:23 PM »
Does anyone have a more useful value than the government numbers? As I understand it, the standard inflation numbers fail to include food, fuel, and medical expenses. You know, the things with the lowest price flexibility.
What use would a consumer price index without food, fuel, and healthcare be?

brewer12345

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Re: Inflation Formula(s)?
« Reply #9 on: April 08, 2013, 07:25:19 PM »
Hmmm you're wondering if your yield is beating inflation.

That's a bit easier. Calculate your yield in a percentage format. Take that and subtract annual inflation for that year.
Does anyone have a more useful value than the government numbers? As I understand it, the standard inflation numbers fail to include food, fuel, and medical expenses. You know, the things with the lowest price flexibility.

When you see CPI ("inflation") reported in the financial media, they usually talk about two versions: top line and "core."  The core excludes fuel and food, but the top line numbers include everything.  Just use the top line number and you will have a reasonable estimate for inflation from year to year.  I am sure we will shortly have members of the tinfoil hat brigade showing up and claiming there is a gubmint conspiracy to underreport CPI for various nefarious purposes.  As a gubmint employee of sorts who works for the subject of many conspiracy theories I assure you: the lunatics runningthe asylum are in no way capable of pulling off anything that complicated.  I am amazed they make it through each day without sufficating themselves with the liners of their cubicle trashcans or wandering into traffic.  Any supposed errors in CPI are due to accident/incompetence.  Google the billion prices project for a hopefully unbiased separate estimate if you like, but top line CPI is as good an estimate as any.
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Kazimieras

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Re: Inflation Formula(s)?
« Reply #10 on: April 09, 2013, 07:32:11 AM »
Hmmm you're wondering if your yield is beating inflation.

That's a bit easier. Calculate your yield in a percentage format. Take that and subtract annual inflation for that year.
Does anyone have a more useful value than the government numbers? As I understand it, the standard inflation numbers fail to include food, fuel, and medical expenses. You know, the things with the lowest price flexibility.

While a bit inaccurate, there are some reasons for how they measure. It first would be impractical to measure everything (e.g. medical expenses on a per person, let alone a yearly basis change wildly, and measuring all of these between hospitals, etc. is just too much work. So what they do is look at the basics that everyone buys and sees what their costs are. Yes, fuel isn't typically counted, however, they look for systemic inflation, not inflation on actual items. For example, if fuel goes up 10% one year, you can rest assured the company making your bread is going to feel that increase. They will then pass that inflation in the fuel price along to you by raising the price of bread. Once that happens, the inflation is now stuck in the system. And it is that stuck inflation that the CPI is meant to measure.

In terms of estimating inflation, if you are in a western developed country it has been on average (the past 100 years), about 2%. Stick with this as your estimate, if you want to be conservative, pad it to 3%. No one can accurately guess what it will be in 5 or 10 years down the line.

matchewed

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Re: Inflation Formula(s)?
« Reply #11 on: April 09, 2013, 12:29:44 PM »
Quote
While a bit inaccurate, there are some reasons for how they measure. It first would be impractical to measure everything (e.g. medical expenses on a per person, let alone a yearly basis change wildly, and measuring all of these between hospitals, etc. is just too much work. So what they do is look at the basics that everyone buys and sees what their costs are. Yes, fuel isn't typically counted, however, they look for systemic inflation, not inflation on actual items. For example, if fuel goes up 10% one year, you can rest assured the company making your bread is going to feel that increase. They will then pass that inflation in the fuel price along to you by raising the price of bread. Once that happens, the inflation is now stuck in the system. And it is that stuck inflation that the CPI is meant to measure.

But fuel is typically measured. I hate to be nitpicky but it would be strange for a car centric culture like the USA to not be. Maybe if we were discussing the inflation of he Vatican City :)

Kazimieras

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Re: Inflation Formula(s)?
« Reply #12 on: April 10, 2013, 10:15:35 AM »
Then perhaps not the best example to be used.

The CPI measures gasoline, but fuel could be diesel or gasoline. Most people use gasoline in the US, whereas transportaiton uses predomiantly diesel. The two prices (diesel and gasoline) do follow each other, however one can inflate much faster than the other. Imagine if gasoline prices stayed the same and diesel went up (it has happened before), this would be that extra fuel cost that gets worked into the system.