Author Topic: Mustachians aren't as subject to inflation  (Read 27088 times)

JZinCO

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Mustachians aren't as subject to inflation
« on: November 25, 2015, 11:38:21 AM »
...is something I've heard on this forum. Sometimes it is said as a preamble to a discussion: "Since Mustachians aren't prone to inflation, " as if it is always a safe assumption.
I'd like to have a discussion on whether or not the cost of living for those who spend frugally increases with inflation at the same rate as for those who spend liberally.

The liberal spender holds a larger % of networth is cash (maybe) subject to inflation. The mustachian, frugal spender holds a larger proportion of net worth in securities. Some securities, such as stocks (esp. the consumer product sector) rise in value with prices. So the frugal spender has more inflation protection.
When it comes to expenses, the liberal spender has a larger debt relative to their net worth. For debt that is in fixed loans (homes, cars) their expenses are less liable to change in lock step with inflation. And the liberal spender is able to pull back discretionary spending, where as the units of goods/services purchased by a frugal spender are less dynamic (because they are spending mostly for core, basic living) and they lack the defensive mechanism of adjusting purchasing.

It also depends on the characteristics of the inflationary environment.
- What I described above probably falls into a cost push environment, where everyone feels the pinch because of rising commodities relative to their earning power.
- In a wage push environment, everyone wins for the time being. However, the ability to increase discretionary spending occurs. In this scenario, the liberal spender forms habits that will hurt them once prices catch up. The frugal spender socks more money into stocks and sees values rise with consumption.
- Last, in a demand pull environment. An increase in consumer demand outstrips supply and pushes prices up. The frugal spender isn't increasing their own demand so they see inflation impact only their baseline expenses. The liberal spenders are the ones whose spending level increased from their baseline and will feel the effect of increased prices on their increased spending.

Those are some thoughts, which I've only start fleshing out. I think it's oversimplistic to say 'mustachians don't feel inflation so much'. It's more nuanced. So to summarize: In an environment where costs to produce increase but wages don't, mustachians are more sensitive to inflation. In an environment where wages drive inflation, mustachians have the most to gain. In an environment where consumer demand drives inflation, the liberal spenders feel the effect more. My thoughts could very well be wrong or missing crucial information, so I will open this up to discussion.

nawhite

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Re: Mustachians aren't as subject to inflation
« Reply #1 on: November 25, 2015, 01:08:23 PM »
I would like to clarify a nuance of the statement. Mustachians are not necessarily the same thing as frugal spenders. Mustachians aren't as vulnerable to inflation as the general public because mustachians will optimize for happiness instead of for a particular good. They can substitute goods for one another more freely than the general public. The "basket of goods" method of calculating inflation (CPI) will absolutely overstate the level of inflation that a mustachian will experience over time. Gas is really expensive this summer? Lets do a bike vacation this year. Fresh food is getting really expensive? Let's start a garden. Alcohol is getting expensive? Let's make some mead. Rent is getting really expensive in this city? Let's move someplace cheaper. The ability and willingness to substitute goods early and often is the biggest protection you have against inflation.

People with large assets can also buy expensive goods that last rather than continually buying cheap goods. For instance, FIRE'd mustachians are probably MUCH more likely to buy solar panels (or even buy more efficient appliances) than the general population. They are also much more likely to do work themselves than pay for someone to do it. An increase of the minimum wage to $15 is absolutely going increase the cost of labor for plumbers, HVAC techs, car mechanics and electricians. That is inflation, and mustachians who are willing do do their own labor are completely insulated from it.

I absolutely believe I'm at least partially insulated from almost all types of inflation other than healthcare and end-of-life care inflation (though honestly by biking and staying active you are probably insulating yourself some from that inflation some too).

JZinCO

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Re: Mustachians aren't as subject to inflation
« Reply #2 on: November 25, 2015, 01:37:20 PM »
I would like to clarify a nuance of the statement. Mustachians are not necessarily the same thing as frugal spenders. Mustachians aren't as vulnerable to inflation as the general public because mustachians will optimize for happiness instead of for a particular good. They can substitute goods for one another more freely than the general public. The "basket of goods" method of calculating inflation (CPI) will absolutely overstate the level of inflation that a mustachian will experience over time. Gas is really expensive this summer? Lets do a bike vacation this year. Fresh food is getting really expensive? Let's start a garden. Alcohol is getting expensive? Let's make some mead. Rent is getting really expensive in this city? Let's move someplace cheaper. The ability and willingness to substitute goods early and often is the biggest protection you have against inflation.
Thanks for your thoughts. You provided a great point. IIRC, the CPI methods assume the same units of good/services for categories are spent with flexibility for sub-categories. So for example, if SUVs/trucks go up more than cars, consumers will consider purchasing a car first. But Mustachians might respond by biking more. Or if beef goes up, CPI analysts will assume consumers purchase more chicken. Mustachians might respond by buying less meat altogether.

You can arbitrage away expenses, but still not inflation though, no? Just like a lavish spender can cut prices when costs soar, a mustachian ditches the liquor store for homebrew mead or buys the raw materials for their DIY home projects. But the costs to purchase ingredients, equipment and other materials still are subject to inflation. For both spenders they are reducing the net dollar value lost to inflation but they are still spending x% more real (let's say this is a cost push situation) than they would have post-expense cutting were they not subject to inflation. I know those with very fixed incomes and expenses lose, but I don't know that Mustachians 'win' anymore than typical consumers who are also flexible in spending.
« Last Edit: November 25, 2015, 01:54:43 PM by JZinCO »

arebelspy

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Re: Mustachians aren't as subject to inflation
« Reply #3 on: November 25, 2015, 03:09:19 PM »

You can arbitrage away expenses, but still not inflation though, no?

Absolutely correct.

I've seen low spenders argue on ERE for years that they've made their life more inflation proof, but the problem is, their low expenses are still subject to inflation.

Okay, so you don't have energy expenses because you have solar panels...but the flour you buy to bake bread is still subject to inflation.

Okay, you don't have gasoline expenses, but the bike tubes are still subject to inflation.

You can get your expenses low, but whatever expenses you do have will still increase over time.

It's a claim that's always bothered me as well, and I don't think it's true at all.

I've said it elsewhere, but repeating here: Inflation is the number one enemy of the early retiree, much more so than a market crash. You can ride out a market crash, but it's much harder to get back purchasing power that's eroded.
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JZinCO

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Re: Mustachians aren't as subject to inflation
« Reply #4 on: November 25, 2015, 03:36:38 PM »
I've said it elsewhere, but repeating here: Inflation is the number one enemy of the early retiree, much more so than a market crash. You can ride out a market crash, but it's much harder to get back purchasing power that's eroded.
Thanks for the second opinion.

Ack! I just ran the numbers to see what would happen after 20 years of 3% inflation if one cut expenses to keep their nominal spending constant through time (e.g. the arbitrage away expenses strategy). The real value of expenses is absurdly low and unsustainable. One simply can't cut expenses each year by the rate of inflation. This makes me feel worried for those that keep their retirement funds in cash or cash equivalents.

brooklynguy

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Re: Mustachians aren't as subject to inflation
« Reply #5 on: November 25, 2015, 06:11:49 PM »
The ability and willingness to substitute goods early and often is the biggest protection you have against inflation.

Mustachians may have higher willingness to substitute goods than the average non-mustachian (and also higher price-consciousness, which is needed in order to put that willingness into practice when it matters), but, generally speaking, I'd say they also have lower ability to do so.  Almost by definition, the less you spend, the less flexibility you have in your spending choices.  Once you've already trimmed the fat out of your budget, you have less ability to make substitutions in your purchases than you did before.

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Re: Mustachians aren't as subject to inflation
« Reply #6 on: November 25, 2015, 07:02:39 PM »
The problem with inflation is that it is determined by a 'basket of goods' on an annual basis, and depending on what types of products and services you use, it varies individually.

For a hardcore Mustachian, we're looking at high self-production which is a huge hedge against inflation. Take a look at the individual goods included in the CPI basket, and you'll easily identify a few areas that do not impact a highly frugal consumer.

For example:
No debt = no susceptibility to interest rate increases
Solar power = less reliance on alternative, more costly energy sources
Gardening = less supermarket prices to keep up with
Bicycling = not subject to gasoline prices
No cable/phone = not subject to increases in the cost of service

Obviously certain products will be subject to typical inflation, but I still tend to agree that a typical "Mustachian" is less subject to the negative impacts of it over time.

arebelspy

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Re: Mustachians aren't as subject to inflation
« Reply #7 on: November 25, 2015, 07:19:19 PM »

The problem with inflation is that it is determined by a 'basket of goods' on an annual basis, and depending on what types of products and services you use, it varies individually.

This is an argument I've heard before, and I don't understand it.

That's how CPI is calculated, but it's irrelevant to inflation itself (the fact that goods cost more over time).

Even if they calculate CPI on that basket of goods, and you buy NONE of those items, that doesn't mean you won't see inflation--you'll have inflation on whatever goods you DO buy.

So why is the basket of goods argument relevant at all?
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MrDelane

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Re: Mustachians aren't as subject to inflation
« Reply #8 on: November 25, 2015, 07:26:44 PM »
bike tubes are still subject to inflation.

That needs to be put on a tshirt.
:)

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Re: Mustachians aren't as subject to inflation
« Reply #9 on: November 25, 2015, 08:20:33 PM »
Mustachians might seem more prone to inflation if you assume that we've reduced our spending to the bare minimum. But presumably we've just optimized it. Non-mustachians might seem more prone to inflation if you assume they've locked into lifestyle choices they can't get out of if prices go up.

It seems to me that the real protection against inflation is if a high percentage of your spending is truly discretionary (and you're smart enough to realize which part of your spending that is). That, and having more appreciating assets than you'll ever need!

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Re: Mustachians aren't as subject to inflation
« Reply #10 on: November 25, 2015, 08:58:16 PM »
The things I buy do increase in price, but it seems to be at a MUCH lower rate than the people around me. People have been telling me their grocery costs are going up by about 10% every year, while we're still landing on that $230/month we've been at for almost four years. Transit passes have gone up over the last few years, and presumably gas as well, but my bike costs the same amount to run ($0) as it always has. I'm told that cell phone data plans and cable television are getting more expensive, but I don't have either of those. My rental insurance premiums are the same as they've always been, same with my cell phone and internet.

The only thing that's gone up noticeably is our rent - five years ago when we moved into this building we were paying $700, now we're up to $776. I imagine we'll eventually see some actual inflation, but it hasn't shown up yet in nearly four years of tracking spending to the penny.

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Re: Mustachians aren't as subject to inflation
« Reply #11 on: November 25, 2015, 10:44:22 PM »
I agree inflation is real.  And my income hasn't kept up with it but myfrugal skills have improved over the years enough that I really don't see it too badly.  2015 "on sale" cheese is the same or less than "full price" 2010 cheese was.  Do frugality skills peak?  If mine have, then my 2020 food bill will be greater than my 2015.  Unless I change how I eat for unrelated reasons ( become vegan, etc) then my cost may stay the same or go down.  That is much more how I actually live my life - it's hard to notice inflation because I move/change my diet/go from 2 cars to 1/etc so often.

I do notice it in cars - I remember deciding when I was 15 that I would NEVER pay more than $10k for a new car.  That didn' last.
 

arebelspy

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Re: Mustachians aren't as subject to inflation
« Reply #12 on: November 26, 2015, 02:04:13 AM »

The things I buy do increase in price, but it seems to be at a MUCH lower rate than the people around me. People have been telling me their grocery costs are going up by about 10% every year

Don't build your plans on complainypants who increase their spending with income and call it inflation.
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arebelspy

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Re: Mustachians aren't as subject to inflation
« Reply #13 on: November 26, 2015, 02:06:17 AM »

It seems to me that the real protection against inflation is if a high percentage of your spending is truly discretionary (and you're smart enough to realize which part of your spending that is).

That's not protection from inflation, or not experiencing inflation. That's cutting back BECAUSE you're being affected by inflation.

That, and having more appreciating assets than you'll ever need!

Yup, that is the way to help protect yourself from the affects of inflation.  But it doesn't mean, like the thread is asking, you're immune to inflation.

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Thegoblinchief

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Re: Mustachians aren't as subject to inflation
« Reply #14 on: November 26, 2015, 06:19:01 AM »
It really doesn't matter, does it? All of the guidelines we use in FIRE planning tie inflation into them.

arebelspy

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Re: Mustachians aren't as subject to inflation
« Reply #15 on: November 26, 2015, 07:05:46 AM »

It really doesn't matter, does it? All of the guidelines we use in FIRE planning tie inflation into them.

It does matter, because you have to plan for it IN FIRE, not just when accumulating.

In other words, in FIRE planning (like you mentioned), you can use a real return so it takes into account inflation, and, while working, your wages will likely keep up with inflation.

But after?  Yes, you can use a real return if and only if your assets can keep up with or beat inflation.

You need to think about inflation when planning your asset allocation, specifically, or it will eat you up in FIRE.
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Re: Mustachians aren't as subject to inflation
« Reply #16 on: November 26, 2015, 07:49:07 AM »
In addition to the widespread misconception that inflation doesn't matter much to low spenders, there's also an ongoing trend of discounting inflation's importance because it has been so low in recent memory.  People cite reports in the financial press that inflation may have even been permanently vanquished, which remind me of the now-infamous proclamations of the "death of equities" in the late '70's.  Most of us are planning for multiple decades into the future--we shouldn't allow recency bias to cause us to let down our guards.

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Re: Mustachians aren't as subject to inflation
« Reply #17 on: November 26, 2015, 07:50:40 AM »
I think I see where Arebelspy and I differ. I agree everyone is likely to see inflation and I agree that inflation can be the enemy of retirement. Where I differ is using the CPI as a measure of the inflation I will see. I think the posted inflation rate is not representative of my personal choices, more so if I choose a mustachian lifestyle. It doesn't mean I'm guaranteed lower inflation rates or higher rates, just different. The other difference is I acknowledge the possibility of a deflationary environment, Canada had deflation in 1953, on average goods were cheaper than 1952. In 2009 the posted rate was 0.31% (US was -0.34%), pretty small and in 2015 its estimated to come in at 1.05% (USA 0.02%), well below the 3% used in planning. There also has been double digit inflation in 1979,1980 where the 3% target was pummeled.

http://www.inflation.eu/inflation-rates/united-states/historic-inflation/cpi-inflation-united-states.aspx

In Canada the basket of goods includes many items I don't purchase; Mortgage interest, Housekeeping services, Paper supplies for cleaning, Financial services (bank fees), Jewelry, cable TV, Newspapers/magazines/books and tobacco. Perhaps those items are below or above 3%, by excluding them my personal inflation is not the same as the national rate.

http://inflationcalculator.ca/cpi-basket/

If you want to assume the safe guideline of 3% you'll probably be safe. If you want to live on the edge you can assume a lower rate of inflation and retire earlier. Having incorrect inflation, high or low, directly effects retirement dates and the success rate. ER in 1978 and you may have been in trouble, inflation could have devastated holdings. In the past decade inflation has been a friend, its averaged well under what was planned for.

BlueMR2

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Re: Mustachians aren't as subject to inflation
« Reply #18 on: November 26, 2015, 07:56:36 AM »
I'd argue that Mustacians can be more at risk of inflation.  It's the required items that seem to be increasing faster than average inflation every year (think insurance, especially health insurance which has been jumping incredibly the last few years).  The optional goods are the ones that run below average inflation.

Prairie Stash

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Re: Mustachians aren't as subject to inflation
« Reply #19 on: November 26, 2015, 08:45:11 AM »
I'd argue that Mustacians can be more at risk of inflation.  It's the required items that seem to be increasing faster than average inflation every year (think insurance, especially health insurance which has been jumping incredibly the last few years).  The optional goods are the ones that run below average inflation.
I'm Canadian, health insurance is cheap. 

But you raise a good point about geographic locations and inflation. Different parts of North America i.e. silicon valley or New York probably experience more inflation than others. Having only heard that those regions are expensive I presume that housing inflation is high. If the plan was to retire in Silicon Valley I'd probably budget 4% inflation or more. Since inflation is a national average that implies other regions have lower inflation than posted rates (Detroit?).


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Re: Mustachians aren't as subject to inflation
« Reply #20 on: November 26, 2015, 09:09:58 AM »
Two additional thoughts:

First.  The price of "free" doesn't increase with inflation.
Second:  Mustachians often do some stockpiling which can give their incomes a chance to catch up with inflations spikes.

Thegoblinchief

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Re: Mustachians aren't as subject to inflation
« Reply #21 on: November 26, 2015, 09:13:50 AM »
Is (non extreme/edge case) inflation primarily tied to the sequence of returns risk in the first 10 years? Or is it something you'd feel the need to keep tabs on all throughout.

Zikoris

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Re: Mustachians aren't as subject to inflation
« Reply #22 on: November 26, 2015, 09:18:29 AM »

The things I buy do increase in price, but it seems to be at a MUCH lower rate than the people around me. People have been telling me their grocery costs are going up by about 10% every year

Don't build your plans on complainypants who increase their spending with income and call it inflation.

I'm not sure it's a case of complainypants lifestyle inflation entirely. From what I've read, grocery inflation seems to vary dramatically by category, with things like meat, dairy, and processed items increasing way faster than flour and lentils. I think it's theoretically possible for their grocery bill to increase by 10% per year without lifestyle inflation just due to eating a more normal diet than me.

Quote
I'd argue that Mustacians can be more at risk of inflation.  It's the required items that seem to be increasing faster than average inflation every year (think insurance, especially health insurance which has been jumping incredibly the last few years).  The optional goods are the ones that run below average inflation.

My required items have increased very little. Canadian health insurance is next to nothing, and paid by my employer anyway. I pay nearly nothing to get around (between zero and $21/month), my food has been the same cost for nearly four years. We do pay $76/month more in rent than we did five years ago, but that seems fairly reasonable.

JZinCO

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Re: Mustachians aren't as subject to inflation
« Reply #23 on: November 26, 2015, 10:04:36 AM »

The things I buy do increase in price, but it seems to be at a MUCH lower rate than the people around me. People have been telling me their grocery costs are going up by about 10% every year

Don't build your plans on complainypants who increase their spending with income and call it inflation.
I'm not sure it's a case of complainypants lifestyle inflation entirely. From what I've read, grocery inflation seems to vary dramatically by category, with things like meat, dairy, and processed items increasing way faster than flour and lentils. I think it's theoretically possible for their grocery bill to increase by 10% per year without lifestyle inflation just due to eating a more normal diet than me.
Imagine if we used gasoline receipts to discuss inflation. OMG! Gasonline is down 33% over last year. It's a deflationary crisis!

I just want to say, it's wise not to use food as a sole indicator for inflation. I love eggs. I buy eggs on a regular basis. Eggs have gone up 44% over last year! Why? Decreased egg supply and new CA animal welfare laws. Food is way too volatile to use as a personal inflation index.
My guess is that it's not complainy pants lifestyle inflation. It's complainy-can't adjust your diet to match reality-pants. This year, it would have been a smart idea to switch from beef to pork because pork prices have fallen dramatically. Ask your neighbors how they've changed their diets over last year. My guess is not much.

edit:Now that I think about it. Ask your neighbors what they've been buying recently because with eggs, flour and steaks (mmmm chicken fried steak) as exceptions, almost all foods have gone down 3-7% over last year.
Also I want to add, that since energy and food are significant slices of the consumer pie, the CPI-U with energy and food is actually down -3%. That 0.2% figure being thrown around is CPI-U is w/o the two categories.
« Last Edit: November 26, 2015, 10:25:10 AM by JZinCO »

Ricky

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Re: Mustachians aren't as subject to inflation
« Reply #24 on: November 26, 2015, 11:20:10 AM »
You can get your expenses low, but whatever expenses you do have will still increase over time.

</thread>

And one could argue that cheaper items are more prone to inflation than "luxury" goods anyway.
« Last Edit: November 26, 2015, 11:43:07 AM by Ricky »

arebelspy

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Re: Mustachians aren't as subject to inflation
« Reply #25 on: November 26, 2015, 11:42:26 AM »

Is (non extreme/edge case) inflation primarily tied to the sequence of returns risk in the first 10 years? Or is it something you'd feel the need to keep tabs on all throughout.

Throughout.
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arebelspy

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Re: Mustachians aren't as subject to inflation
« Reply #26 on: November 26, 2015, 11:49:12 AM »

Two additional thoughts:

First.  The price of "free" doesn't increase with inflation.
Second:  Mustachians often do some stockpiling which can give their incomes a chance to catch up with inflations spikes.

Ugh. No.

These are the comments people make that annoy me.  No offense 2ndTimer. But both of these are completely irrelevant. But people say these type of things as a reason why they'll experience less inflation, but it's just not true.  Because while both of your thoughts are true, both are irrelevant.

Regarding #1: Sure, free may not increase. But you weren't counting that in your expenses anyways. If you had free entertainment via hiking in a nearby national park, you didn't count that in your expenses. So maybe free doesn't inflate, but it's irrelevant, because whatever you were spending IS subject to inflation.

(As an aside, this one may not be true, cause free has nowhere to go but up. Your best case scenario is it stays free, but it might instead start to cost money--say, a national park that used to be free but now costs money.  But even if it is true, and free stays free, it's irrelevant per the point above.)

Regarding #2: Sure, you may have stockpiled, but when you do spend, it will be at an increased amount. Additionally, if you're buying sooner, you may get it at lower prices before it inflates, but you lose the time value of money (having that money invested). Assuming your investments beat inflation, you're losing out even more by stockpiling than by just paying the inflated prices, but later, after the money has grown more.

Both of your sentences are true.  But both are irrelevant. And I see stuff like this all the time to explain why someone will be more immune to inflation, and the fact is that's just not true.  :)
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Re: Mustachians aren't as subject to inflation
« Reply #27 on: November 26, 2015, 11:49:45 AM »
Whether your personal inflation rate is higher or lower than average plays one part.

Your investments, however, will certainly be influenced by the overall inflation rate.

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Re: Mustachians aren't as subject to inflation
« Reply #28 on: November 26, 2015, 12:26:43 PM »
Does anyone know a good source for inflation data of different goods? This seems like it would be easy to figure out with that data and the relative proportions used in the CPI. We could come up with our own ratio for the MPI (Mustachian Price Index) and then calculate an average MPI and compare it to CPI for the same time period. And that should settle it.

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Re: Mustachians aren't as subject to inflation
« Reply #29 on: November 26, 2015, 12:43:36 PM »
If we are talking overall, large scale inflation, I'm not buying the premise that mustachians are better able to finagle their way around inflation.  Sure, if it is just milk and beet that goes up then we can drink soy milk and eat pork.  But if overall the buying power of the dollar slips 8%, that's going to be 8% across the board, more or less.  That "more or less" may offer a slight bit of wiggle room, but that probably means moving away from a 10% item and substituting a 6% item, and even then sometimes you need what you need. 

I don't think mustachianism makes one either more or less subject to inflation.  Having more expenses does mean there's more to be cut if things get ugly, but that seems not entirely related to inflation. 

DH and my plan against inflation is largely having a COL-adjusted pension.  We project it to be more than enough for us to live on if necessary, assuming we get a paid off house, so we feel about as inflation-proof in our plan as anyone could be. 

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Re: Mustachians aren't as subject to inflation
« Reply #30 on: November 26, 2015, 01:31:09 PM »
If we are talking overall, large scale inflation, I'm not buying the premise that mustachians are better able to finagle their way around inflation.  Sure, if it is just milk and beet that goes up then we can drink soy milk and eat pork.  But if overall the buying power of the dollar slips 8%, that's going to be 8% across the board, more or less.  That "more or less" may offer a slight bit of wiggle room, but that probably means moving away from a 10% item and substituting a 6% item, and even then sometimes you need what you need. 

I don't think mustachianism makes one either more or less subject to inflation.  Having more expenses does mean there's more to be cut if things get ugly, but that seems not entirely related to inflation. 

DH and my plan against inflation is largely having a COL-adjusted pension.  We project it to be more than enough for us to live on if necessary, assuming we get a paid off house, so we feel about as inflation-proof in our plan as anyone could be.
I don't pay mortgage interest. That's a relatively large part of the basket of goods. Cable TV is also in there and new vehicle prices. You can decide if that changes the calculation. I posted the link already.

If you differ from the average consumer inflation will affect you at a different rate. Stats Canada posts its calculations and I'm sure the USA does too. Here in Canada they post regional inflation rates as well, they differ from national rates. Apparently not everyone is the same across the country and making broad assumptions like inflation is the same for all is erroneous. Places like Vancouver, Toronto or Nunavut are more expensive than other locales. Over the past 50 years Toronto has always cost more to live than my home town, pretty sure that trend will continue.

If you can accept that some places are more expensive to live then you can accept inflation differs on location. Is it that much of a stretch to look at individuals within sub-populations? We're all different in some way, why would we all have exactly the same inflation?

arebelspy

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Re: Mustachians aren't as subject to inflation
« Reply #31 on: November 26, 2015, 01:48:14 PM »

If we are talking overall, large scale inflation, I'm not buying the premise that mustachians are better able to finagle their way around inflation.  Sure, if it is just milk and beet that goes up then we can drink soy milk and eat pork.  But if overall the buying power of the dollar slips 8%, that's going to be 8% across the board, more or less.  That "more or less" may offer a slight bit of wiggle room, but that probably means moving away from a 10% item and substituting a 6% item, and even then sometimes you need what you need. 

I don't think mustachianism makes one either more or less subject to inflation.  Having more expenses does mean there's more to be cut if things get ugly, but that seems not entirely related to inflation. 

DH and my plan against inflation is largely having a COL-adjusted pension.  We project it to be more than enough for us to live on if necessary, assuming we get a paid off house, so we feel about as inflation-proof in our plan as anyone could be.
I don't pay mortgage interest. That's a relatively large part of the basket of goods.

Too bad, if you did, you'd be more protected from inflation (if you had a fixed mortgage rate).

Quote
If you can accept that some places are more expensive to live then you can accept inflation differs on location. Is it that much of a stretch to look at individuals within sub-populations? We're all different in some way, why would we all have exactly the same inflation?

Over time places will have approximately the same, otherwise, due to simple compounding, the prices to live will get much too disparate.

Sure, people can have higher or lower than average inflation, but we can't know ahead of time what stuff will rise faster or slower than average.

It's the same problem as timing the markets--without a working crystal ball, you can't foresee. People trying to claim they'll have less is silly, because how do they know the things they purchase won't go up higher than average?

In general, over a long time frame, it'll roughly even out to average.
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Re: Mustachians aren't as subject to inflation
« Reply #32 on: November 26, 2015, 02:25:00 PM »
Does anyone know a good source for inflation data of different goods? This seems like it would be easy to figure out with that data and the relative proportions used in the CPI. We could come up with our own ratio for the MPI (Mustachian Price Index) and then calculate an average MPI and compare it to CPI for the same time period. And that should settle it.
Yes. The bls produces this aggregated to region and the nation. They break categories down very finely. One could look back and get an idea to say what the least inflation sensitive products have been. For example we know the nominal value of technology has inflated at a lower rate than food housing or vehicles over the past couple decades.
Of course making a strategy that is less sensitive to inflation would be silly because you'd have to account for myriad of factors such as aggregate demand, supply, changes in its market such as infrastructure, logistics, technology, regulation, etc etc. One example is pv panels. They've probably disinflated or maybe even deflated over the past decade because of technological leaps. Looking back is futile BC you'd be comparing low efficiency panels to those.with high effiency and an artificial demand via govt incentives. OTOH a comparison would be useful for clothing BC the market hasn't changes appreciably since passage of free trade acts.

I would like to personally see, based on my spending what my personal inflation rate has been and also how much annual volatility my basket of goods have. Alas, I couldn't find .csv's, but someone who can scrape webpages could get this done. Iirc you should navigate to the cpi-u pubs on the bls webpage. They publish data monthly in electronic PDF pubs. Open one and scroll down to table 25 for historic data.
« Last Edit: November 26, 2015, 02:40:37 PM by JZinCO »

Villanelle

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Re: Mustachians aren't as subject to inflation
« Reply #33 on: November 26, 2015, 02:32:18 PM »
If we are talking overall, large scale inflation, I'm not buying the premise that mustachians are better able to finagle their way around inflation.  Sure, if it is just milk and beet that goes up then we can drink soy milk and eat pork.  But if overall the buying power of the dollar slips 8%, that's going to be 8% across the board, more or less.  That "more or less" may offer a slight bit of wiggle room, but that probably means moving away from a 10% item and substituting a 6% item, and even then sometimes you need what you need. 

I don't think mustachianism makes one either more or less subject to inflation.  Having more expenses does mean there's more to be cut if things get ugly, but that seems not entirely related to inflation. 

DH and my plan against inflation is largely having a COL-adjusted pension.  We project it to be more than enough for us to live on if necessary, assuming we get a paid off house, so we feel about as inflation-proof in our plan as anyone could be.
I don't pay mortgage interest. That's a relatively large part of the basket of goods. Cable TV is also in there and new vehicle prices. You can decide if that changes the calculation. I posted the link already.

If you differ from the average consumer inflation will affect you at a different rate. Stats Canada posts its calculations and I'm sure the USA does too. Here in Canada they post regional inflation rates as well, they differ from national rates. Apparently not everyone is the same across the country and making broad assumptions like inflation is the same for all is erroneous. Places like Vancouver, Toronto or Nunavut are more expensive than other locales. Over the past 50 years Toronto has always cost more to live than my home town, pretty sure that trend will continue.

If you can accept that some places are more expensive to live then you can accept inflation differs on location. Is it that much of a stretch to look at individuals within sub-populations? We're all different in some way, why would we all have exactly the same inflation
?


I absolutely and readily accept that.  What I don't accept is that you or anyone really knows how various sub-populations or products will be affected.  Perhaps mortgage interest/housing costs will be the part of inflation that stays low, in which case you'd have a *higher* inflation that the average market basket. Or large vehicles or any other thing mustachians are less likely to buy. So since we can't know, it makes sense to assume that we'll all be roughly average, rather than to assume that we will come out ahead some how.  IOW, there's no more reason to think we'll be less affected by inflation than there is to think we'll be more affected.

arebelspy

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Re: Mustachians aren't as subject to inflation
« Reply #34 on: November 27, 2015, 02:35:24 AM »

IOW, there's no more reason to think we'll be less affected by inflation than there is to think we'll be more affected.

Bingo.

I've never heard a coherent reason oh how or why one can or would be subject to less inflation.

All the arguments people tend to put forth on that are arguments for how to reduce spending, but not why they'll see less inflation on the things they do spend money on, which I think you'd need a crystal ball for.
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Re: Mustachians aren't as subject to inflation
« Reply #35 on: November 27, 2015, 05:23:02 AM »
As usual, any apparent disagreements seem to stem from our different definitions or assumptions. I accept (following correction from ARS) that there's a difference between (a) experiencing inflation and (b) being able to respond to that experience by changing my spending patterns. But really, as long as I have (b) I will worry less about (a). I might need to change my language to "People with large discretionary incomes (or fewer fixed expenses) are less likely to be harmed by inflation" or "will probably have less downside".

Like, we all experience wind equally, but some of us put on a coat.

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Re: Mustachians aren't as subject to inflation
« Reply #36 on: November 27, 2015, 05:32:42 AM »
Sure, if you can cut back, great, but you are still experiencing inflation.

And if you can cut back that much, you probably worked longer than necessary.  Mustachians who are already optimized probably don't have giant discretionary spending to cut back on, so are even more susceptible to it than most people (experiencing the same amount of inflation, but being less able to cut back).

I prefer the solution of having your asset allocation protect you from inflation, rather than having to cut back.

Sounds like we agree now though. :)
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Re: Mustachians aren't as subject to inflation
« Reply #37 on: November 27, 2015, 06:16:03 AM »
Mustachians who are already optimized probably don't have giant discretionary spending to cut back on, so are even more susceptible to it than most people (experiencing the same amount of inflation, but being less able to cut back).

So maybe I'll start us disagreeing again! I think what you say here is widely understood or assumed on the site, but not necessarily so. Non-mustachian spending is often "discretionary" in the sense of "would change given a massive boot in the arse", but otherwise locked in (e.g., massive payments on underwater house or accumulated debt).

I think my ideal mustachian lifestyle/budget would involve quite a bit of discretionary spending on fairly luxurious items. Travel, fancy food, whatever... optimized, of course, but still discretionary.

In practice, I'm only just beginning to do this, because growing up poor has encouraged me to design aggressive minimalism into my spending. But I'm working on it. There may be a deeper philosophical question here, something like "Can we train ourselves to be fully satisfied with a simple basic life and also to fully appreciate any luxuries that come into our reach?" And there may be a deeper answer like "Nothing is inherently basic or luxurious." But I'm not there yet.

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Re: Mustachians aren't as subject to inflation
« Reply #38 on: November 27, 2015, 06:18:11 AM »
I won't respond here, as it's off topic, but feel free to start a thread about that. :)
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Re: Mustachians aren't as subject to inflation
« Reply #39 on: November 27, 2015, 08:26:45 AM »

Two additional thoughts:

First.  The price of "free" doesn't increase with inflation.
Second:  Mustachians often do some stockpiling which can give their incomes a chance to catch up with inflations spikes.

Ugh. No.

These are the comments people make that annoy me.  No offense 2ndTimer. But both of these are completely irrelevant. But people say these type of things as a reason why they'll experience less inflation, but it's just not true.  Because while both of your thoughts are true, both are irrelevant.

Regarding #1: Sure, free may not increase. But you weren't counting that in your expenses anyways. If you had free entertainment via hiking in a nearby national park, you didn't count that in your expenses. So maybe free doesn't inflate, but it's irrelevant, because whatever you were spending IS subject to inflation.

(As an aside, this one may not be true, cause free has nowhere to go but up. Your best case scenario is it stays free, but it might instead start to cost money--say, a national park that used to be free but now costs money.  But even if it is true, and free stays free, it's irrelevant per the point above.)

Regarding #2: Sure, you may have stockpiled, but when you do spend, it will be at an increased amount. Additionally, if you're buying sooner, you may get it at lower prices before it inflates, but you lose the time value of money (having that money invested). Assuming your investments beat inflation, you're losing out even more by stockpiling than by just paying the inflated prices, but later, after the money has grown more.

Both of your sentences are true.  But both are irrelevant. And I see stuff like this all the time to explain why someone will be more immune to inflation, and the fact is that's just not true.  :)

You put a lot of thought into this.  Very interesting and insightful.  Thanks, I will think hard about it.

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Re: Mustachians aren't as subject to inflation
« Reply #40 on: November 27, 2015, 07:31:18 PM »
Like, we all experience wind equally, but some of us put on a coat.
A great way to put a cap on this.

Now that I think we have hashed this out well and the maths show that you can't trim expenses to 'fight' inflation, at least not ad infinitum, can we move from expenses to managing assets (i.e. strategies to adapt to or hedge against inflation's effects)? My former question was a more theoretical/academic question. So let's feed this information into our practices.

so here is part 2: What can you do about inflation?
To continue our discussion, I am linking to this quote from the thread where I was inspired to start this thread:
Your example of raises is in a boom time with lack of employees.

Not in an inflationary time.  Look at the stagflation from the 70s.  Wages weren't keeping up with inflation real time, and workers were scared to leave jobs in a bad economy.  A job is not a "good" solution to inflation. It's okay, but lags even worse than most good investments.

...
I've talked with several folks that were in the workforce in the 70's.  I only threw out my example because it was very similar to theirs.  If I thought my experience was an anecdote, I would've said as much.  Instead, I feel that it is an eye-opener for us younger people that weren't working in the 70's.

Or maybe I'll flip my line of questioning on its head, since no-one is addressing questions about what folks are doing to prepare for it, other than acknowledging that  'yeah, we should be weak at the knees in the face of inflation' but thinking that rents and passive investments will do 'plenty well enough'.

Run a thought experiment where inflation spikes, for a decade, to 7%.  I would imagine that the government would pull out 'all the stops' to 'whip inflation' (although I'm not sure what it would look like, since we're as pro-inflationary as I can imagine with interest rates at zero and quantitative easing.  Maybe the government will move from giving us some money (https://www.irs.gov/uac/Facts-about-the-2008-Stimulus-Payments / https://www.irs.gov/uac/First-Time-Homebuyer-Credit-Questions-and-Answers:-Basic-Information) to just giving everyone lots of money somehow.  Honestly, predicting the future is a weak point and I never put my own money on my ability.  But I do like to think about these things.

Where would you be after a decade of 7% inflation?  Can you raise rents 7% (or more) 10 years in a row with the same tenants?   Are your companies the stalwarts of the economy that can raise dividends and interest 7% for a decade because people can't survive without them?

Yeah, I think inflation could single-handedly put an end to ER (hence my 'active income' comment).  But I don't have any easy answer to what to do about it.
« Last Edit: November 27, 2015, 07:38:43 PM by JZinCO »

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Re: Mustachians aren't as subject to inflation
« Reply #41 on: November 27, 2015, 08:05:20 PM »
I don't know how actionable a suggestion it is, but as I said earlier, DH and I worry very little because he'll have a COL-adjusted pension (military).  That's our primary strategy.  His pension will be enough to cover a slightly-scaled back lifestyle, assuming we have a paid off house by the time we FIRE.  It's not a strategy that everyone an implement, but that's what we've done about it in our plan. 

arebelspy

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Re: Mustachians aren't as subject to inflation
« Reply #42 on: November 28, 2015, 12:27:25 AM »
COL adjustments tend to lag inflation as well but they're better than nothing.
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Re: Mustachians aren't as subject to inflation
« Reply #43 on: November 28, 2015, 08:11:54 PM »
If we are talking overall, large scale inflation, I'm not buying the premise that mustachians are better able to finagle their way around inflation.  Sure, if it is just milk and beet that goes up then we can drink soy milk and eat pork.  But if overall the buying power of the dollar slips 8%, that's going to be 8% across the board, more or less.  That "more or less" may offer a slight bit of wiggle room, but that probably means moving away from a 10% item and substituting a 6% item, and even then sometimes you need what you need. 

I don't think mustachianism makes one either more or less subject to inflation.  Having more expenses does mean there's more to be cut if things get ugly, but that seems not entirely related to inflation. 

DH and my plan against inflation is largely having a COL-adjusted pension.  We project it to be more than enough for us to live on if necessary, assuming we get a paid off house, so we feel about as inflation-proof in our plan as anyone could be.
I don't pay mortgage interest. That's a relatively large part of the basket of goods. Cable TV is also in there and new vehicle prices. You can decide if that changes the calculation. I posted the link already.

If you differ from the average consumer inflation will affect you at a different rate. Stats Canada posts its calculations and I'm sure the USA does too. Here in Canada they post regional inflation rates as well, they differ from national rates. Apparently not everyone is the same across the country and making broad assumptions like inflation is the same for all is erroneous. Places like Vancouver, Toronto or Nunavut are more expensive than other locales. Over the past 50 years Toronto has always cost more to live than my home town, pretty sure that trend will continue.

If you can accept that some places are more expensive to live then you can accept inflation differs on location. Is it that much of a stretch to look at individuals within sub-populations? We're all different in some way, why would we all have exactly the same inflation
?


I absolutely and readily accept that.  What I don't accept is that you or anyone really knows how various sub-populations or products will be affected.  Perhaps mortgage interest/housing costs will be the part of inflation that stays low, in which case you'd have a *higher* inflation that the average market basket. Or large vehicles or any other thing mustachians are less likely to buy. So since we can't know, it makes sense to assume that we'll all be roughly average, rather than to assume that we will come out ahead some how.  IOW, there's no more reason to think we'll be less affected by inflation than there is to think we'll be more affected.
First off, loving this debate and thank you to everyone.

I can know some products that exceed inflation. I predict stock returns will exceed inflation, if not my retirement plan is in trouble ;) I predict house prices to match inflation long term, ARS is usually a proponent of using it as a hedge. My local electricity market will exceed inflation into 2030, it's based on the projected cost of replacing coal plants ahead of schedule. I don't know everything, but I can learn a few data points and hope the rest work out to average. I only need to make small adjustments, a little bit is the same as boosting my returns by getting a lower MER.

Over the past 40 years have electronics exceeded, matched or been below inflation? My parents spent a lot more on a TV than I did. That's an example of items below inflation that most people can identify.

ARS, I know Americans can hedge with inflation. My mortgage was renewed every 5 years, not much advantage. I know you were kidding.

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Re: Mustachians aren't as subject to inflation
« Reply #44 on: November 29, 2015, 02:55:58 AM »

Over the past 40 years have electronics exceeded, matched or been below inflation? My parents spent a lot more on a TV than I did. That's an example of items below inflation that most people can identify.

Ah, I've been waiting for this argument!  :D

People love to say electronics are a good example of deflation, because the prices go down, so that helps counter inflation in your budget.  This is partly true, however it may be less applicable to Mustachians (if we buy less electronics on average, and keep them longer, they'll be a smaller proportion of their budget, meaning less deflation to counteract inflation, meaning a higher percent of inflation overall).

Further, I don't even accept that it's true: the opposite in fact may be. The missing component is that, with new technology coming out that didn't exist at the earlier time, that ADDS extra spending.

Sure, your parents may have paid more for a TV, so now they'd pay less for that when it's time to replace it, but they didn't pay for a Smartphone, Tablet, ebook reader, or laptop back then, and now they probably would.

Maybe in the future THOSE things are so much cheaper, but you're paying so much more for a virtual reality thingamabob, or a self-driving car to take you to the store when you're older and more immobile, or an AI robot to care for you/do housework.

Just as certain technology got cheaper for your grandparents (telephones, say), new ones came in (washing machines and fridges).  So did they have deflation on electronics?  Probably not.  Probably an even LARGER proportion of their budget went to electronics. Will you have technology deflation?  Probably not.

Yes, you can do without those new things, at the cost of making your life worse (compared to those around you, which is pretty much the only definition of the meaningless word "worse"), but that's exactly an example of inflation: even if your spending doesn't go up (same spending gets you a lower standard of living).

So... how's my response to the electronics = deflation argument? Convince anyone? ;)

(Pretty much the only argument one can say, IMO is "well...I just won't get that stuff, I'm fine with the same standard of living as before" which...fine, but that's still experiencing inflation, and you may not feel that way when you're deprived of some technology that would let you interact better with your grandkids, or help your elderly care, or whatever.)

Thanks to OP for starting this topic, and everyone for contributing thoughts--as you can tell, inflation is one of my favorite ER topics. I've been meaning to start a thread on it forever!  :D
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Re: Mustachians aren't as subject to inflation
« Reply #45 on: November 29, 2015, 07:03:47 AM »

Yes, you can do without those new things, at the cost of making your life worse (compared to those around you, which is pretty much the only definition of the meaningless word "worse"), but that's exactly an example of inflation: even if your spending doesn't go up (same spending gets you a lower standard of living).

So... how's my response to the electronics = deflation argument? Convince anyone? ;)

Not me! :-)

1: Making my life "worse" in the sense that my neighbours have more/better/newer gadgets than I do doesn't faze me at all. In the same way that it doesn't faze me wrt house size, vehicle, etc.

2: I do have technology that my parents' generation didn't have -- a laptop, LCD TV, internet access, a programmable thermostat, a cell phone, a guitar amp (total cost $1040 plus $55 a month). So my total "electronics" line resembles my parents' line (dumb thermostat, tube TV, radio, landline phone, record player, maybe $1500 + $60 a month in today's dollars). But my stuff saves BIG money on other budget lines: travel, long distance calls, magazines, postage, heating, records, movies. Plus  lines they never had, like "recording studio", that indirectly lower entertainment costs.

(I think my point 2 is me half-remembering and paraphrasing MMM's nail gun argument.)


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Re: Mustachians aren't as subject to inflation
« Reply #46 on: November 29, 2015, 10:00:59 AM »

IOW, there's no more reason to think we'll be less affected by inflation than there is to think we'll be more affected.

Bingo.

I've never heard a coherent reason oh how or why one can or would be subject to less inflation.

All the arguments people tend to put forth on that are arguments for how to reduce spending, but not why they'll see less inflation on the things they do spend money on, which I think you'd need a crystal ball for.

Re: coherent argument for/against one being more/less affected by inflation:

The argument I want to see is inflation-index items that actually apply to me. What is their rate of inflation?

Inflation averages a given rate annually (5% is a rate I think I've seen a lot). That rate of inflation is based on the CPI, right? The CPI is based on a set proportion of eight categories (and their sub-categories):

    FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks)
    HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture)
    APPAREL (men's shirts and sweaters, women's dresses, jewelry)
    TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance)
    MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services)
    RECREATION (televisions, toys, pets and pet products, sports equipment, admissions);
    EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories);
    OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses).

Here's my question: The CPI is an average, which is great. But on an individual level, given my particular life/financial circumstances, I don't participate in a goodly portion of those categories, or significant portions of their sub-categories. Should I still be assuming a 5% average rate of inflation?

For examples,

We don't eat out or drink alcohol, but that's 5% of the CPI basket in the FOOD category.
We own our home outright, so we don't pay rent or mortgage or OER, but that's 24% of the CPI in the HOUSING category.
We don't buy new vehicles or lease them, but that's almost 4% in the TRANS category.
We don't have pets or watch TV, but that's 2.5% of the CPI in the RECREATION category.
Etc., etc., etc.


If I calculated the inflation rate based on the things we actually spend money on, will it be closer to zero, or closer to 5%?. The data is there....Is there any way to calculate this, short of tediously hand-comparing ALL the tiny numbers in the BLS spreadsheets? I wish there was a form/calculator for this.

matchewed

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Re: Mustachians aren't as subject to inflation
« Reply #47 on: November 29, 2015, 10:06:21 AM »

IOW, there's no more reason to think we'll be less affected by inflation than there is to think we'll be more affected.

Bingo.

I've never heard a coherent reason oh how or why one can or would be subject to less inflation.

All the arguments people tend to put forth on that are arguments for how to reduce spending, but not why they'll see less inflation on the things they do spend money on, which I think you'd need a crystal ball for.

Re: coherent argument for/against one being more/less affected by inflation:

The argument I want to see is inflation-index items that actually apply to me. What is their rate of inflation?

Inflation averages a given rate annually (5% is a rate I think I've seen a lot). That rate of inflation is based on the CPI, right? The CPI is based on a set proportion of eight categories (and their sub-categories):

    FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks)
    HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture)
    APPAREL (men's shirts and sweaters, women's dresses, jewelry)
    TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance)
    MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services)
    RECREATION (televisions, toys, pets and pet products, sports equipment, admissions);
    EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories);
    OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses).

Here's my question: The CPI is an average, which is great. But on an individual level, given my particular life/financial circumstances, I don't participate in a goodly portion of those categories, or significant portions of their sub-categories. Should I still be assuming a 5% average rate of inflation?

For examples,

We don't eat out or drink alcohol, but that's 5% of the CPI basket in the FOOD category.
We own our home outright, so we don't pay rent or mortgage or OER, but that's 24% of the CPI in the HOUSING category.
We don't buy new vehicles or lease them, but that's almost 4% in the TRANS category.
We don't have pets or watch TV, but that's 2.5% of the CPI in the RECREATION category.
Etc., etc., etc.


If I calculated the inflation rate based on the things we actually spend money on, will it be closer to zero, or closer to 5%?. The data is there....Is there any way to calculate this, short of tediously hand-comparing ALL the tiny numbers in the BLS spreadsheets? I wish there was a form/calculator for this.

Each one of those things are affected by inflation differently, not as a fraction of overall inflation. CPI is a great metric for overall analysis of the question "is inflation happening and in general by how much?". Not so good for "how much is inflation happening to me?". The easier method is to track your spending and have the ability to compare categories of your spending now to your spending later.

APowers

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Re: Mustachians aren't as subject to inflation
« Reply #48 on: November 29, 2015, 10:23:05 AM »

IOW, there's no more reason to think we'll be less affected by inflation than there is to think we'll be more affected.

Bingo.

I've never heard a coherent reason oh how or why one can or would be subject to less inflation.

All the arguments people tend to put forth on that are arguments for how to reduce spending, but not why they'll see less inflation on the things they do spend money on, which I think you'd need a crystal ball for.

Re: coherent argument for/against one being more/less affected by inflation:

The argument I want to see is inflation-index items that actually apply to me. What is their rate of inflation?

Inflation averages a given rate annually (5% is a rate I think I've seen a lot). That rate of inflation is based on the CPI, right? The CPI is based on a set proportion of eight categories (and their sub-categories):

    FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks)
    HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture)
    APPAREL (men's shirts and sweaters, women's dresses, jewelry)
    TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance)
    MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services)
    RECREATION (televisions, toys, pets and pet products, sports equipment, admissions);
    EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories);
    OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses).

Here's my question: The CPI is an average, which is great. But on an individual level, given my particular life/financial circumstances, I don't participate in a goodly portion of those categories, or significant portions of their sub-categories. Should I still be assuming a 5% average rate of inflation?

For examples,

We don't eat out or drink alcohol, but that's 5% of the CPI basket in the FOOD category.
We own our home outright, so we don't pay rent or mortgage or OER, but that's 24% of the CPI in the HOUSING category.
We don't buy new vehicles or lease them, but that's almost 4% in the TRANS category.
We don't have pets or watch TV, but that's 2.5% of the CPI in the RECREATION category.
Etc., etc., etc.


If I calculated the inflation rate based on the things we actually spend money on, will it be closer to zero, or closer to 5%?. The data is there....Is there any way to calculate this, short of tediously hand-comparing ALL the tiny numbers in the BLS spreadsheets? I wish there was a form/calculator for this.

Each one of those things are affected by inflation differently, not as a fraction of overall inflation. CPI is a great metric for overall analysis of the question "is inflation happening and in general by how much?". Not so good for "how much is inflation happening to me?". The easier method is to track your spending and have the ability to compare categories of your spending now to your spending later.

Yes, I understand that it's a weighted average, since different items inflate at different rates. But the data is still all there, if we wanted an inflation rate for any of the sub- or sub-sub-categories in the basket.

Yes, a good way to calculate a personal inflation rate is to track personal spending. But that doesn't really help me compare to historical periods or over a long term-- I only have 5 years of data. It doesn't help me when I ask "how much would I have been spending if had been living the same way in the 1970s?"

bacchi

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Re: Mustachians aren't as subject to inflation
« Reply #49 on: November 29, 2015, 10:56:28 AM »
I posted this before in the other inflation thread but the Billion Prices Project uses prices from products around the nation and world. It closely tracks CPI, indicating that CPI is a pretty damn good approximation.

Quote
BPP monitored daily price fluctuations of ~5 million items sold by ~300 online retailers in more than 70 countries.

(emphasis added)

https://en.wikipedia.org/wiki/MIT_Billion_Prices_project