Author Topic: What inflation is expected?  (Read 776 times)

pecunia

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What inflation is expected?
« on: July 11, 2018, 06:29:26 PM »
Inflation has been defined as too much money chasing too few goods.

I have watched videos of old Milton Friedman lecturing about the money supply.  I didn't really like the guy, but he made a lot of sense.  If the quantity of money goes up, it will be worth less.

Looks like with the United States borrowing money, quantitative easing and some easy credit that the money supply is becoming inflated.  I see prices slowly rising in the grocery stores and I suppose the same is true for most other commodities. 

I see the need for the US to play further games with the money supply.  The aging demographics of the United States and obligations to support the burgeoning older population means that transfer payments to these folks must be made.  There will be future wars to be paid forand the existing ones that linger on.  The country is poorer.  Exports aren't what they once were.  The population no longer has the good jobs it once had.  Folks simply cannot pay the taxes they used to.  It just seems like it will be time to go down into the basement of the mint and let those presses roll on.

Inflation can change one's life from being of affluence to poverty.

I would appreciate any thoughts on this matter and as to how one can deal with expected scenarios.

Radagast

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Re: What inflation is expected?
« Reply #1 on: July 11, 2018, 07:06:39 PM »
The easy answer is to look up the yield on treasury inflation protected security (TIPS) bonds
https://wsj.com/mdc/public/page/2_3020-tips.html

and look up the yield on regular treasury bonds
https://wsj.com/mdc/public/page/2_3021-bondyield.html

Then subtract the yields from the nearest matching maturity dates. The difference gives you the inflation expected by all the world's top experts who have real money to make or lose based on being right or not. A regular bond maturing in 2028 (10-year) is yielding 2.844% right now. A TIPS in maturing July 2028 is yielding 0.616%. So, 2.84 - 0.62 = expected inflation is about 2.2% over the next 10 years.



Retire-Canada

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Re: What inflation is expected?
« Reply #2 on: July 11, 2018, 08:51:58 PM »
Inflation can change one's life from being of affluence to poverty.

I would appreciate any thoughts on this matter and as to how one can deal with expected scenarios.

A portfolio with strong equities allocation is a good hedge for inflation as is a 30yr mortgage. If you run a 90% stocks and 10% bonds portfolio in cFIREsim for 30yrs at 4%WR [say $40K/yr inflation adjusted spend from an initial $1M] has a 97% success rate against historical data which includes all sorts of inflation trends.

So if you are willing to buy into the future being no worse than the past you don't have to do anything too radical to address the possible impacts of inflation.

ChpBstrd

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Re: What inflation is expected?
« Reply #3 on: July 11, 2018, 09:20:44 PM »
Inflation has been defined as too much money chasing too few goods.

I have watched videos of old Milton Friedman lecturing about the money supply.  I didn't really like the guy, but he made a lot of sense.  If the quantity of money goes up, it will be worth less.


Whatever you do, don't take the bait for the simplistic theory that inflation = increase in number of dollars the government puts in circulation / existing dollars in circulation. By comparing a chart of M1 or M2 (money supply) against actual inflation rates, you'll see there's not much correlation. Currency does not operate like the number of shares a corporation issues. More currency does not necessarily divide the pie into smaller slices. Learn about monetary velocity, which much better explains price changes and why supply must grow with the economy.

Second, anyone who proclaims themselves an "Austrian economist" learned economics by arguing in forums since 2008 that hyperinflation was imminent. Rather than conceding that the facts did not support their theory, they're going for a second decade of being wrong as any good forum argument does. After all, what would you do if you put all your money in gold collector coins sold on Fox News for 50% over the value of the metal since 2009?

Also, avoid the thought that some methods of storing and exchanging value are legitimate or illegitimate due to categorical factors. All currency is valuable solely by "fiat" (human opinions or customs imposed upon us by others) including "precious" metals. Cryptocurrency is the latest example of something that has value only because others agree it has value.

Radagast

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Re: What inflation is expected?
« Reply #4 on: July 11, 2018, 09:30:17 PM »
As for what you can do. Yes, the "market" will be wildly wrong in expectations sometimes. Inflation is a large and ever-present risk, which Bernstein argues is both the biggest risk and the one which you can most easily compensate for.

The first much-debated option on this forum is to have a long-term fixed-rate mortgage, which will evaporate (or sublimate? sub-prime-ate?) with high inflation. Another option might be to invest in "value" companies / companies with a lot of debt liabilities, for the same reason that they will continue to earn money while their debts evaporate, making them more valuable. Bill Bernstein argues that stocks of commodities companies and especially precious metals producers have historically done very well during high inflation. Inflation protected bonds (TIPS in tax-sheltered accounts, i-Bonds) are another choice, but all they will do is avoid losing money themselves, they won't compensate for other losses or have high long-term returns. "Real" investments like real estate are also a good choice. Some people say gold, but history so far has shown that to be hit and miss, it is merely uncorrelated, not negatively correlated.

bwall

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Re: What inflation is expected?
« Reply #5 on: July 12, 2018, 12:21:29 AM »
ChpBstrd: +1.

If you are worried about inflation (I am not), then the best thing you can do is to take out the largest long term loan at the lowest possible rate. In other words, buy as many $1m+ houses as you can and then watch as inflation makes the payments easier over time.

talltexan

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Re: What inflation is expected?
« Reply #6 on: July 12, 2018, 09:31:42 AM »
There is a second kind of inflation which is when hidden costs cause suppliers to have to raise their prices. We may see more of that with the Tariffs that are cropping up everywhere.

DreamFIRE

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Re: What inflation is expected?
« Reply #7 on: July 12, 2018, 09:46:30 AM »

New article at CNBC just today on this topic.

"Consumer prices rise at the fastest pace in 6 years"

https://www.cnbc.com/2018/07/11/us-consumer-price-index-june-2018.html

Quote
In the 12 months through June, the CPI increased 2.9 percent, the biggest gain since February 2012.

pecunia

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Re: What inflation is expected?
« Reply #8 on: July 13, 2018, 09:34:47 AM »
Great responses.  I have been doing just a little reading of the Austrian economists.  Now - that the doubt question as to their validity has been offered my skeptical mind may be working better.

You are the right folks for me to be asking.

Financial.Velociraptor

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Re: What inflation is expected?
« Reply #9 on: July 13, 2018, 02:59:12 PM »
My assessment of long term inflation expectations?  They are low.  Reason being, check the long term US Treasuries and their trend: https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

The 10 year note was recently over 3% and has been declining since even though the Fed is promising to raise funds rate.  Clearly, the institutional money is counting on inflation being substantially below 3% for quite a long time.

bamboopuppy

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Re: What inflation is expected?
« Reply #10 on: July 13, 2018, 05:53:20 PM »
Read the writings of Paul Krugman, an economist who has consistently debunked the people claiming runaway inflation was just around the corner for the past decade. While some increase in inflation is possible as the economy is doing well at the moment with near full employment, the indicators aren't showing it. Wage growth is still low, so I wouldn't worry about inflation.

ChpBstrd

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Re: What inflation is expected?
« Reply #11 on: July 14, 2018, 07:35:44 AM »
Great responses.  I have been doing just a little reading of the Austrian economists.  Now - that the doubt question as to their validity has been offered my skeptical mind may be working better.

You are the right folks for me to be asking.

It's one of those internet cults that makes it rewarding for adherents to predict an apocalypse and tell the naysayers "you'll see!" The reward is the constant anticipation of being proven right. The longer they are wrong, the more anticipation they get. Extra social status points can be had in the ingroup for investing 100% in physical gold!

privatefarmer

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Re: What inflation is expected?
« Reply #12 on: July 14, 2018, 08:10:35 AM »
Inflation has been defined as too much money chasing too few goods.

I have watched videos of old Milton Friedman lecturing about the money supply.  I didn't really like the guy, but he made a lot of sense.  If the quantity of money goes up, it will be worth less.


Whatever you do, don't take the bait for the simplistic theory that inflation = increase in number of dollars the government puts in circulation / existing dollars in circulation. By comparing a chart of M1 or M2 (money supply) against actual inflation rates, you'll see there's not much correlation. Currency does not operate like the number of shares a corporation issues. More currency does not necessarily divide the pie into smaller slices. Learn about monetary velocity, which much better explains price changes and why supply must grow with the economy.

Second, anyone who proclaims themselves an "Austrian economist" learned economics by arguing in forums since 2008 that hyperinflation was imminent. Rather than conceding that the facts did not support their theory, they're going for a second decade of being wrong as any good forum argument does. After all, what would you do if you put all your money in gold collector coins sold on Fox News for 50% over the value of the metal since 2009?

Also, avoid the thought that some methods of storing and exchanging value are legitimate or illegitimate due to categorical factors. All currency is valuable solely by "fiat" (human opinions or customs imposed upon us by others) including "precious" metals. Cryptocurrency is the latest example of something that has value only because others agree it has value.

+1 for calling out Fox News and how they prey on the financially illiterate and the elderly. I despise what they put out as "news" but I also am sickened by all the reverse mortgage and gold commercials I see on that channel. And the worst part is that a lot of old folk who don't have much for a retirement are suckered into these scams.