### Author Topic: How do you save when inflation takes it all away?  (Read 30685 times)

#### Spork

• Walrus Stache
• Posts: 5747
##### Re: How do you save when inflation takes it all away?
« Reply #50 on: July 26, 2013, 01:04:22 PM »

I am going to stick by my guns with my anecdata on inflation views as political signalling, and I certainly don't think it's worth crucifying anyone for or is analogous to calling anyone stupid.  Everyone I know who is worried about inflation is pretty conservative/libertarian and sees it as an inevitable result of quantitative easing.  I certainly don't think these people are stupid, even though I don't happen to agree.

Personally, while I am a bit worried about QE causing inflation: I entirely hope I am wrong and you are right.

#### Tony_SS

• Posts: 59
• Location: MO
##### Re: How do you save when inflation takes it all away?
« Reply #51 on: July 26, 2013, 01:50:02 PM »
I don't have much time today, but I've been running my business for over 6 years. The cost of one item for example has risen from .89 each to 1.59 each. That is 73% over 7 years = 10.4% a year. Another item was .77 per piece, now 1.05 over 6 years = 6.06% increase per year. Couple examples for me personally there.

FYI - Your math on this is wrong.  73% over 7 years is NOT 10.4% per year.  10.4% per year would be \$1.78.  --   \$.89 * 1.1047 = \$1.78.

Instead you want \$.89 * x7 = \$1.59
x7=1.7865
x=1.086
So it's actually 8.6% per year in this example.

Ah, I meant .89 to 1.59 over 6 years. = 78.6% increase / 6 = 13.1% every year. Yikes...

#### Eric

• Magnum Stache
• Posts: 4061
• Location: On my bike
##### Re: How do you save when inflation takes it all away?
« Reply #52 on: July 26, 2013, 02:05:50 PM »
I don't have much time today, but I've been running my business for over 6 years. The cost of one item for example has risen from .89 each to 1.59 each. That is 73% over 7 years = 10.4% a year. Another item was .77 per piece, now 1.05 over 6 years = 6.06% increase per year. Couple examples for me personally there.

FYI - Your math on this is wrong.  73% over 7 years is NOT 10.4% per year.  10.4% per year would be \$1.78.  --   \$.89 * 1.1047 = \$1.78.

Instead you want \$.89 * x7 = \$1.59
x7=1.7865
x=1.086
So it's actually 8.6% per year in this example.

Ah, I meant .89 to 1.59 over 6 years. = 78.6% increase / 6 = 13.1% every year. Yikes...

But you can't just divide the total increase by the number of years, because the denominator changes every year.  (the first year, it increases from .89, the second from .98, and so on)  If you want 6 years, then you'd want:
\$.89 * x6 = \$1.59
x6=1.7865
x=1.1015
or a yearly increase of 10.15%
« Last Edit: July 26, 2013, 02:08:12 PM by Eric »

#### matchewed

• Magnum Stache
• Posts: 4427
• Location: CT
##### Re: How do you save when inflation takes it all away?
« Reply #53 on: July 26, 2013, 02:13:36 PM »
Also you're taking one item from your one business calculating inflation (incorrectly) for it and coming to the conclusion that inflation is really at 10%.

Regarding changing how CPI is calculated - it should change. As the basket of goods that is being bought by consumers changes, as the overall weight of these items relative to overall expenses changes, as people develop either better or faster methods of calculating a truly difficult calculation, as technology allows us to use more complicated information systems to get a more precise result... I would certainly hope that it changes.

You can sit back and not understand a single change being made and paint it as manipulation. Or you can accept the fact that things do change and for non-manipulative reasons.

The site that you linked has that bias I was referring to when I spoke of a narrative. All the things you are saying and all the actual facts you are ignoring conveniently fit a narrative that you have built. That narrative being, inflation is higher than reported and that the reported information is manipulated by the government.

#### Tony_SS

• Posts: 59
• Location: MO
##### Re: How do you save when inflation takes it all away?
« Reply #54 on: July 26, 2013, 02:16:05 PM »
It's a 78.6% increase over 6 years. Divide that by 6, I get an average of 13.1% increase per year.

#### livetogive

• Stubble
• Posts: 235
##### Re: How do you save when inflation takes it all away?
« Reply #55 on: July 26, 2013, 02:17:01 PM »

Owning equities is how many investors cope with inflation.

Yes.  Generally the stock market will move up on pace with inflation even if actual growth is flat.  There is motivation for governments to manipulate inflation numbers in order to pay off outsized national debts, so I think you're rather sharp personally.

Absolutely don't do this, but you can get really nerdy with inflation & currency valuation if you have the time to read up on it.  A couple years ago a friend of mine made a tidy profit in swiss franc fixed income instruments and derivatives as the dollar plummeted in value.  He's also a professional trader and again, don't do that.  I only make the point to show there are other ways around it if you look.

You can't divide the 78.6% increase over 6 years, you have to use CAGR as stated above.

#### matchewed

• Magnum Stache
• Posts: 4427
• Location: CT
##### Re: How do you save when inflation takes it all away?
« Reply #56 on: July 26, 2013, 02:22:57 PM »
It's a 78.6% increase over 6 years. Divide that by 6, I get an average of 13.1% increase per year.

Do your math backwards. 13.1% inflation over six years with \$0.89 gives you \$1.86.

13.1%    \$0.89
\$1.01
\$1.14
\$1.29
\$1.46
\$1.65
\$1.86

#### Tony_SS

• Posts: 59
• Location: MO
##### Re: How do you save when inflation takes it all away?
« Reply #57 on: July 26, 2013, 02:29:04 PM »
Also you're taking one item from your one business calculating inflation (incorrectly) for it and coming to the conclusion that inflation is really at 10%.

Regarding changing how CPI is calculated - it should change. As the basket of goods that is being bought by consumers changes, as the overall weight of these items relative to overall expenses changes, as people develop either better or faster methods of calculating a truly difficult calculation, as technology allows us to use more complicated information systems to get a more precise result... I would certainly hope that it changes.

You can sit back and not understand a single change being made and paint it as manipulation. Or you can accept the fact that things do change and for non-manipulative reasons.

The site that you linked has that bias I was referring to when I spoke of a narrative. All the things you are saying and all the actual facts you are ignoring conveniently fit a narrative that you have built. That narrative being, inflation is higher than reported and that the reported information is manipulated by the government.

As I explained and Eric corrected, I'm seeing over 10% in one example. That is my reality I cope with when trying to stay profitable. Is it all inflation? Maybe not, but malinvestment does come with inflation, so it's all a part of it.

So what do you think of the official unemployment numbers? If you don't think those aren't fudged, then there's no help for you. It's a fact they don't report certain sectors to lower the percentage, like people who's benefits have run out and so on. Call it tin foil, call it whatever, but it's a distortion. The same is applied to core CPI. As noted this does not apply to everyone, certainly not my business.

#### matchewed

• Magnum Stache
• Posts: 4427
• Location: CT
##### Re: How do you save when inflation takes it all away?
« Reply #58 on: July 26, 2013, 02:45:37 PM »
Is it truly manipulation and distortion when it is so blatant and transparent?

#### Jacob F

• Posts: 43
• Age: 36
• Location: Greensboro NC
##### Re: How do you save when inflation takes it all away?
« Reply #59 on: July 26, 2013, 02:55:32 PM »
Tony, you should stop trying to attack a virtual number all the time. It's meaningless.
Besides that all public statistics are highly transparent and analyzed, whether it is about correct or a little understated doesn't really matter. You haven't come up with anything to support your thesis yet (except for some random numbers of items you sell without even saying what it actually is). The Bigmac index is just a tiny tiny fraction of the inflation, too, and is used only to compare in between countries, not so much to compare between years. Changes in quality of the burger or calorie content etc. are not even taken into account.

The point is, there's two options for you (coming back to your opening post):

1. saving and investing in the right assets: You _will_ outrun inflation in the long run and grow your net worth.

2. spending all your money and don't save:  You will always be playing catch-up with interest payments, growing a negative net worth once you get into slightest trouble.

The good thing is, you can choose.

#### Jamesqf

• Magnum Stache
• Posts: 4047
##### Re: How do you save when inflation takes it all away?
« Reply #60 on: July 26, 2013, 02:57:47 PM »
My first car, a chevy cavalier cost me 12k in 1996. I looked at the last cavalier issued in 2005 ... the same price. Then I looked at more recent entry-level cars, like the sparks and it is more or less the same price still.

Yet the price of a new car is utterly irrelevant to me.  Now if there was an index for decent used car prices...

Quote
Away from home food is about 5% of the CPI. Has restaurant prices doubled in the last 10 years? Not from what I remember. Lets look at the Big Mac Index that is reported by The Economist.

If you seldom or never eat away from home (and wouldn't eat a Big Mac on a bet) this too is irrelevant.

Quote
Gas is 5% of expenditure. Pump price was 1.45 in 2003 and is now 3.69 so an increase of 9.5% a year vs 8.9% from the BLS

But if you look at it as cost per mile...  Well, in 2003 I was driving a Honda CRX that got about 40 mpg, so that was about 3.63 cents/mile.  Today I drive an Insight that gets 71.4 mpg, or 5.17 cents/gal, so my cost per mile inflation rate is only 3.6% (if I pressed the right buttons...)  And if you started out driving a guzzler, your cost/mile inflation rate could easily be negative :-)

My cost of housing has gone down over the period, since I refinanced my house at a much lower interest rate than the ~7% I was paying when I bought it.

Now on the savings end, I can look at 10 year rate of return for the mutual funds I've owned over that period (though this isn't exact for me, of course, since money goes in, comes out, and gets moved around).

PREIX   7.03%
PRIDX 13.22%
PRWCX  9.30%
RPSIX  6.23%

Total stash (excluding house value) is more than 4X what it was 10 years ago, increasing about 15%/year, well over the ~2.3% annualized inflation rate per CPI.

#### Tony_SS

• Posts: 59
• Location: MO
##### Re: How do you save when inflation takes it all away?
« Reply #61 on: July 26, 2013, 02:58:34 PM »
Is it truly manipulation and distortion when it is so blatant and transparent?

How can a critical omission of data be so obvious to the average person watching the nightly news?

#### Jamesqf

• Magnum Stache
• Posts: 4047
##### Re: How do you save when inflation takes it all away?
« Reply #62 on: July 26, 2013, 03:02:42 PM »
Absolutely don't do this, but you can get really nerdy with inflation & currency valuation if you have the time to read up on it.  A couple years ago a friend of mine made a tidy profit in swiss franc fixed income instruments and derivatives as the dollar plummeted in value.

I did this myself, quite by accident.  I worked in Switzerland for a spell, and was paid in Swiss francs when the franc was about 80 cents.  Left a chunk of the money banked there for several years, as there was a chance I would be going back for another stint.  That didn't materialize, but by the time I finally closed the account, the franc was over \$1.

As I explained and Eric corrected, I'm seeing over 10% in one example.

OK, but it's pretty easy to find examples of things that have become cheaper in the same time period.  One trivial example: how much did a cell phone cost in 2003?  Not even a smart phone*, just a basic phone that you can buy today for \$20 or so, and get pay-as-you-go service for (in my case) about \$7/month.

*Trick question: how much did an iPhone cost in 2003?
« Last Edit: July 26, 2013, 03:12:22 PM by Jamesqf »

#### Tony_SS

• Posts: 59
• Location: MO
##### Re: How do you save when inflation takes it all away?
« Reply #63 on: July 26, 2013, 03:08:09 PM »
Tony, you should stop trying to attack a virtual number all the time. It's meaningless.
Besides that all public statistics are highly transparent and analyzed, whether it is about correct or a little understated doesn't really matter. You haven't come up with anything to support your thesis yet (except for some random numbers of items you sell without even saying what it actually is). The Bigmac index is just a tiny tiny fraction of the inflation, too, and is used only to compare in between countries, not so much to compare between years. Changes in quality of the burger or calorie content etc. are not even taken into account.

The point is, there's two options for you (coming back to your opening post):

1. saving and investing in the right assets: You _will_ outrun inflation in the long run and grow your net worth.

2. spending all your money and don't save:  You will always be playing catch-up with interest payments, growing a negative net worth once you get into slightest trouble.

The good thing is, you can choose.

I'm not trying to attack anyone. And my costs are real no matter if you believe them or not. I have to deal with that everyday. They represent cotton and specialty paper products.

I disagree about the Big Mac Index... you're putting together a product that relies on many different items. Bread, beef, produce, labor, energy, etc. Fast food pricing is a pretty solid indicator in my opinion.

I am anxious to get investing..that's why I'm here.

#### Spork

• Walrus Stache
• Posts: 5747
##### Re: How do you save when inflation takes it all away?
« Reply #64 on: July 26, 2013, 03:18:57 PM »
how much did a cell phone cost in 2003?

Um, I'll answer: free with service.   I think every phone I've ever owned was free with service*.

*exception: the phone I use now cost some pittance when it was new in 2005.  But it was my wife's phone then and mine was: free with service.

#### matchewed

• Magnum Stache
• Posts: 4427
• Location: CT
##### Re: How do you save when inflation takes it all away?
« Reply #65 on: July 26, 2013, 03:25:44 PM »
Is it truly manipulation and distortion when it is so blatant and transparent?

How can a critical omission of data be so obvious to the average person watching the nightly news?

By that person actually looking into and becoming an informed person by looking up the information themselves. Took me all of two minutes to find out who performs the CPI, what the criteria is, and to download a pdf that I can study at my leisure to figure out and have a better understanding of the calculation.

The transparency of it all is my main point. How is it manipulation if I tell you exactly what I'm doing? This isn't a magic trick, it's not Penn and Teller, it's statistics and data analysis and they tell you how and why they do it.

And even if we were to entertain the assumption that it was manipulated for nefarious purposes, what purposes would those be? What would the motivation for hiding a 10% per year inflation rate?

#### livetogive

• Stubble
• Posts: 235
##### Re: How do you save when inflation takes it all away?
« Reply #66 on: July 26, 2013, 05:41:02 PM »
What would the motivation for hiding a 10% per year inflation rate?

It's a way to pay back your debts at your citizen saver's expense.  [not so] hypothetical:

My name is Sam.  I took out a loan at 2% and now owe you \$10,000 in 10 years.  I also have the ability to directly and indirectly manipulate inflation.  If I keep inflation low i'll feel the pain of having to pay you \$10,000 in 10 years.  But what if (for arguments sake only) I caused hyperinflation and 10 years from now \$10,000 buys about 3 tanks of gas.  I borrowed enough to buy a car with today and paid you back in 10 years with 3 tanks of gas.  That's the motivation.

Also if you're responsible for making the economy look better AND keeping inflation in check (2 competing goals by the way), you can have your cake and eat it too by boosting a recovery with low rates then telling everyone inflation is only 2% so it's all good.

#### Jamesqf

• Magnum Stache
• Posts: 4047
##### Re: How do you save when inflation takes it all away?
« Reply #67 on: July 26, 2013, 07:22:45 PM »
how much did a cell phone cost in 2003?

Um, I'll answer: free with service.   I think every phone I've ever owned was free with service*.

Wrong.  That on-contract phone had a cost, which you were paying off at \$X per month.  It's just that for sales purposes the cost was bundled in with the service, because many people would have balked at paying several hundred dollars for the phone up front.

But if you don't like the cell phone example, it's easy to come up with plenty of other examples where prices have gone down, because changing technology has made them cheaper to produce.  Likewise, the items with prices that increase faster than the general inflation rate are generally doing so because they use some increasingly scarce resource.

Or here's a non-tech example: a decade ago, a small (1/4 lb?) package of fresh blueberries cost several dollars (here in the west), now they've in my supermarket at \$2.98/lb for the last month or so.  Is that deflation, or just farmers planting more blueberry bushes, and so increasing the supply?

#### matchewed

• Magnum Stache
• Posts: 4427
• Location: CT
##### Re: How do you save when inflation takes it all away?
« Reply #68 on: July 26, 2013, 09:11:13 PM »
What would the motivation for hiding a 10% per year inflation rate?

It's a way to pay back your debts at your citizen saver's expense.  [not so] hypothetical:

My name is Sam.  I took out a loan at 2% and now owe you \$10,000 in 10 years.  I also have the ability to directly and indirectly manipulate inflation.  If I keep inflation low i'll feel the pain of having to pay you \$10,000 in 10 years.  But what if (for arguments sake only) I caused hyperinflation and 10 years from now \$10,000 buys about 3 tanks of gas.  I borrowed enough to buy a car with today and paid you back in 10 years with 3 tanks of gas.  That's the motivation.

Also if you're responsible for making the economy look better AND keeping inflation in check (2 competing goals by the way), you can have your cake and eat it too by boosting a recovery with low rates then telling everyone inflation is only 2% so it's all good.

Fair enough I'll have to concede that my question as to the motivation could be theoretically performed as a multi-year scam run by our government which can't even execute a multi-year budget. All that ineptitude is just a smoke screen.

Well I'll drop my theoretical assumption and come back around to the lack of evidence that inflation really is out of control right now. I'm still waiting on the data to support that.

#### Spork

• Walrus Stache
• Posts: 5747
##### Re: How do you save when inflation takes it all away?
« Reply #69 on: July 26, 2013, 09:46:52 PM »
how much did a cell phone cost in 2003?

Um, I'll answer: free with service.   I think every phone I've ever owned was free with service*.

Wrong.  That on-contract phone had a cost, which you were paying off at \$X per month.  It's just that for sales purposes the cost was bundled in with the service, because many people would have balked at paying several hundred dollars for the phone up front.

You did read the* part right?  Where I am using the 2005 phone still?  Is the cost paid off now? ;)

A rather obtuse point here: I used to work for a company that made feature phones.  They were sold at a "profit" of something like -\$10.  Yes, that's a negative.  They were incentive for things like "wouldn't you like to buy 50 monster switching systems?"  Feature phones had to be bullet proof.  If they failed in under 2 years, they had to be replaced.  So they were designed to last LOTS longer.

They were not so much subsidized by the contract of the phone.  They were subsidized by the idiots that had to have the coolest phone every 6 months.

That doesn't mean your point was wrong... it just means cell phones weren't the right example.  Sorry for being a thorn in your paw.
« Last Edit: July 26, 2013, 10:00:27 PM by Spork »

#### worms

• Bristles
• Posts: 382
##### Re: How do you save when inflation takes it all away?
« Reply #70 on: July 26, 2013, 11:06:07 PM »
...they were designed to last LOTS longer.
If anywhere,  that is where the published inflation figures let me down.  The pace of technological change for some products and year-on-year cost shaving for some other products mean that for some things the product's effective life is shorter. The purchase price might be the same or lower but the long-term cost to me of maintaining the functional ability is higher.  As far as I am aware, the inflation figures are only designed to reflect purchase price - achieving long-term value is where mustachianism comes in!

#### Simple Abundant Living

• Pencil Stache
• Posts: 579
##### Re: How do you save when inflation takes it all away?
« Reply #71 on: July 26, 2013, 11:44:27 PM »

OP, I would suggest you read "Your money or your life" to get a new perspective on inflation. It's written by Domingez and Robin. Basically, he calls inflation bull, if you're not a hardcore consumer that buys the latest gadget and appliance the second it comes out. He also points out that technology seems to have reverse inflation. Think how much you paid for your 36" tv in 1990. Compare to what you can get a flat screen LCD or plasma of the same size now.

#### livetogive

• Stubble
• Posts: 235
##### Re: How do you save when inflation takes it all away?
« Reply #72 on: July 26, 2013, 11:56:01 PM »

Fair enough I'll have to concede that my question as to the motivation could be theoretically performed as a multi-year scam run by our government which can't even execute a multi-year budget. All that ineptitude is just a smoke screen.

Well I'll drop my theoretical assumption and come back around to the lack of evidence that inflation really is out of control right now. I'm still waiting on the data to support that.

Fair enough on the data, but the crappy thing about inflation is that the financial markets do it for you.  So you could just be inept and run a deficit every year and the rest takes care of itself!  I personally think the Fed is pretty competent though, but I don't think i'm in the majority on that one.

#### tomsang

• Handlebar Stache
• Posts: 1085
##### Re: How do you save when inflation takes it all away?
« Reply #73 on: July 27, 2013, 12:04:53 AM »
Like most things. There is no good or bad. It is how you handle the environment that you are given. If you think there is or will be significant inflation then invest in assets and liabilities that would benefit from inflation.

Turn off paranoia fueled media and focus on the facts. Structure your life around taking advantage of the opportunities that are present.  If you let emotions rule your life you will fall behind and become pissed at the system. The system throws free more at those that keep an open mind.

Good luck!!  This is fun!

#### Micheal

• Stubble
• Posts: 103
##### Re: How do you save when inflation takes it all away?
« Reply #74 on: July 27, 2013, 12:57:04 AM »
To get back to your question, if you want to "beat" the interest rate as you perceive it so be it, then you need to cut your costs somewhere.  And invest wisely, if you can save %5 on your expenditures, then make %7 on your investments your up %2.  Its simple math, why make it much more difficult.  If you wish to artificially handicap yourself the extra %7 then you just have to buckle down, invest wisely, and optimize optimize optimize.  then you can FIRE along with those calculating at %3 inflation and probably be ahead of the rest of us.  It's really up to you.  Until my wifes student loan debt is paid it going to be a moot point for me but hey thats just my two cents worth.

#### Jamesqf

• Magnum Stache
• Posts: 4047
##### Re: How do you save when inflation takes it all away?
« Reply #75 on: July 27, 2013, 11:46:12 AM »
As far as I am aware, the inflation figures are only designed to reflect purchase price...

That's a common misunderstanding.  Prices of individual items go up & down for all sorts of reasons - technological change, crop failures, scarcity: basically the law of supply & demand.  Inflation (or deflation) is a change in the value of the money you use to buy those items with.

So you can have prices of some things increasing (oil, for instance) or decreasing (just about anything electronic) due to changes in supply & demand, with little or no change in the value of money.  Or conversely, you can have the supply & demand stay the same, but prices go up due to government decreasing the value of money.  The classic case of this is German hyperinflation between WWI and WWII.  The prices of goods in stable currencies (dollars, pounds, Swiss francs) didn't change, but went sky-high in German marks.

Granted, in an economy like ours it's not always easy to separate out the two reasons for the difference in the price you pay, but it seems obvious (to me, anyway) that when the price of something like gasoline goes up a bunch while other prices stay pretty much the same, the reason has nothing to do with inflation.

#### mpbaker22

• Handlebar Stache
• Posts: 1095
##### Re: How do you save when inflation takes it all away?
« Reply #76 on: July 28, 2013, 04:14:50 PM »
^ I like your Big Mac Index, that is near 5%. I'm not trying to cherry pick, but fast food price is a good indicator.

I don't have much time today, but I've been running my business for over 6 years. The cost of one item for example has risen from .89 each to 1.59 each. That is 73% over 7 years = 10.4% a year. Another item was .77 per piece, now 1.05 over 6 years = 6.06% increase per year. Couple examples for me personally there.

I'm sure alot of people will take issue with this here too, but according to this side, if the CPI was calculated today the exact same way is was in 1980 you'd have ~10% inflation. The methods are changed and there are links on this page outlining that. Take if for what its worth to you. I'm sure some will dismiss is a conspiracy theory. lol. I call it creative manipulation. My clients have done this constantly with their annual reports, even on the fly. It was pretty amusing.

I'm not complaining about it. I'm only saying the CPI is a broad term that people like to throw around without knowing much about it. Your results will vary! Side issue anyway. The problem is that I'm saving and not investing. I'm realizing that. That problem will be solved as soon as this little debt emergency is clear.

So you've cherry picked one particular item, you failed to do the math even remotely correctly, and that's your proof of your inflation?  How bout you list every item you regularly purchase or even the top ten items in terms of total \$\$ spent on those items over the course of a year.  Then we can calculate your very own CPI and see where your inflation really is.

#### Jamesqf

• Magnum Stache
• Posts: 4047
##### Re: How do you save when inflation takes it all away?
« Reply #77 on: July 28, 2013, 06:14:58 PM »
Then we can calculate your very own CPI and see where your inflation really is.

That still wouldn't give his inflation rate, just the price increases in stuff he buys.  Inflation is not price increases (which can happen for all sorts of reasons), it's a decrease in the value of money.

It's maybe not intuitively obvious, but the simple version is that "money" really isn't a thing in itself, it's a symbol that we can use to stand for any sort of good or service: a bushel of wheat, a pair of shoes, some software development, whatever.  Using the symbols facilitates exchange, so that if you're a farmer who needs a pair of new shoes, you don't have to hunt for a shoemaker who needs a few bushels of wheat, you can sell the wheat to the miller for a handful of symbols, then give some of them to the shoemaker - who in turn can give some to the baker in exchange for bread.

Now it seems pretty obvious that for this all to work, there must be a 1:1 ratio between symbols and goods.  Otherwise you could just fake up some symbols to give to the shoemaker.  Further, this faking increases the supply of symbols, so that instead of needing 100 symbols to buy shoes, you might need 101 or 102.  But also, new goods are created all the time (in an expanding economy), so the symbol supply needs to grow to match.

So we've put governments in charge of making the symbols, and making new ones to match growth.  But the government has debts of its own, so it becomes awful tempting to pay off those debts with new symbols that don't correspond to goods.  When a government does this, it dilutes the value of all symbols (money), and so you get inflation.

Inflation makes all prices rise by an equal amount.  Your new shoes might now cost 200 symbols instead of 100, but you can sell your wheat for 2 symbols/bushel instead of 1.

#### dragoncar

• Walrus Stache
• Posts: 9800
• Registered member
##### Re: How do you save when inflation takes it all away?
« Reply #78 on: July 28, 2013, 09:06:39 PM »
Then we can calculate your very own CPI and see where your inflation really is.

That still wouldn't give his inflation rate, just the price increases in stuff he buys.  Inflation is not price increases (which can happen for all sorts of reasons), it's a decrease in the value of money.

It's maybe not intuitively obvious, but the simple version is that "money" really isn't a thing in itself, it's a symbol that we can use to stand for any sort of good or service: a bushel of wheat, a pair of shoes, some software development, whatever.  Using the symbols facilitates exchange, so that if you're a farmer who needs a pair of new shoes, you don't have to hunt for a shoemaker who needs a few bushels of wheat, you can sell the wheat to the miller for a handful of symbols, then give some of them to the shoemaker - who in turn can give some to the baker in exchange for bread.

Now it seems pretty obvious that for this all to work, there must be a 1:1 ratio between symbols and goods.  Otherwise you could just fake up some symbols to give to the shoemaker.  Further, this faking increases the supply of symbols, so that instead of needing 100 symbols to buy shoes, you might need 101 or 102.  But also, new goods are created all the time (in an expanding economy), so the symbol supply needs to grow to match.

So we've put governments in charge of making the symbols, and making new ones to match growth.  But the government has debts of its own, so it becomes awful tempting to pay off those debts with new symbols that don't correspond to goods.  When a government does this, it dilutes the value of all symbols (money), and so you get inflation.

Inflation makes all prices rise by an equal amount.  Your new shoes might now cost 200 symbols instead of 100, but you can sell your wheat for 2 symbols/bushel instead of 1.

Inflation is absolutely the increase in prices.  You say it's the decrease in the value of money.  But how do you value money?  By the stuff you can get with it.

#### Jamesqf

• Magnum Stache
• Posts: 4047
##### Re: How do you save when inflation takes it all away?
« Reply #79 on: July 28, 2013, 11:55:05 PM »
Inflation is absolutely the increase in prices.  You say it's the decrease in the value of money.  But how do you value money?  By the stuff you can get with it.

The point is that prices can increase (or decrease) for two entirely different reasons: inflation and supply & demand.  Consider the last few years.  The price of oil increased because of demand & scarcity, but at the same time the price of anything electronic decreased, while prices overall (measured by CPI, etc) increased a little bit due to inflation.

It helps to understand this if you read about extreme cases like the German hyperinflation http://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_Republic  The German government inflated the mark to ridiculous degrees, to the point where a loaf of bread cost several billion marks.  Now there wasn't any great crop failure or famine, and the price of bread in neighboring countries stayed pretty much the same in their currencies.  Seems obvious that what actually changed was the value of the money.

#### dragoncar

• Walrus Stache
• Posts: 9800
• Registered member
##### Re: How do you save when inflation takes it all away?
« Reply #80 on: July 29, 2013, 03:15:42 AM »
Inflation is absolutely the increase in prices.  You say it's the decrease in the value of money.  But how do you value money?  By the stuff you can get with it.

The point is that prices can increase (or decrease) for two entirely different reasons: inflation and supply & demand.  Consider the last few years.  The price of oil increased because of demand & scarcity, but at the same time the price of anything electronic decreased, while prices overall (measured by CPI, etc) increased a little bit due to inflation.

It helps to understand this if you read about extreme cases like the German hyperinflation http://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_Republic  The German government inflated the mark to ridiculous degrees, to the point where a loaf of bread cost several billion marks.  Now there wasn't any great crop failure or famine, and the price of bread in neighboring countries stayed pretty much the same in their currencies.  Seems obvious that what actually changed was the value of the money.

It's not like measuring inflation as "the value of money" obviates this issue.  For example, lets say the price of oil increases and the price of electronics decreases.  Therefore, the value of a dollar has decreased in barrels of oil and has increased in hard drives.  So has the overall value of a dollar increased or decreased?  Well that depends on how much oil you personally buy and how many electronics you buy.  Hence, personal CPI.

#### Mike

• Stubble
• Posts: 110
• Location: Eagan, MN
##### Re: How do you save when inflation takes it all away?
« Reply #81 on: July 29, 2013, 04:14:10 AM »
It's not that difficult to find where the inflation is - simply start by looking at the Fed's policies and what they are designed to do.  Low short-term rates = cheaper to borrow money and take risk.  Thus, people take it in the shorts if they wish to park their money in savings accounts / CD's rather than the equities markets (which have made significant gains this year so far).  Low long-term rates (QE) = cheaper to finance or refinance a mortgage - which ultimately drives prices of housing higher.

I don't believe long-term easy money policy is the smartest thing to be doing given the risks of inflating asset bubbles / causing future crashes / creating potentially big inflation down the line, but at least for the time being, things seem to be holding up pretty well.

#### Christof

• Pencil Stache
• Posts: 712
• Age: 46
• Location: Germany
##### Re: How do you save when inflation takes it all away?
« Reply #82 on: July 29, 2013, 05:55:55 AM »
For example, lets say the price of oil increases and the price of electronics decreases.  Therefore, the value of a dollar has decreased in barrels of oil and has increased in hard drives.  So has the overall value of a dollar increased or decreased?  Well that depends on how much oil you personally buy and how many electronics you buy.
Even in this small example you would run into problems... You can only compare past against current prices, if you buy the same product. That is somewhat easy to do for food, gas, and the like, but not for non-consumable goods like electronics.

I spend less money this month than I did 12 months ago. By your definition that means my personal inflation rate is negative. What I'm doing, though, is buying different (and less) stuff.

#### dragoncar

• Walrus Stache
• Posts: 9800
• Registered member
##### Re: How do you save when inflation takes it all away?
« Reply #83 on: July 29, 2013, 11:15:47 AM »
For example, lets say the price of oil increases and the price of electronics decreases.  Therefore, the value of a dollar has decreased in barrels of oil and has increased in hard drives.  So has the overall value of a dollar increased or decreased?  Well that depends on how much oil you personally buy and how many electronics you buy.
Even in this small example you would run into problems... You can only compare past against current prices, if you buy the same product. That is somewhat easy to do for food, gas, and the like, but not for non-consumable goods like electronics.

I spend less money this month than I did 12 months ago. By your definition that means my personal inflation rate is negative. What I'm doing, though, is buying different (and less) stuff.

In what world did I propose a definition in which your situation results in a negative personal inflation rate?

#### Christof

• Pencil Stache
• Posts: 712
• Age: 46
• Location: Germany
##### Re: How do you save when inflation takes it all away?
« Reply #84 on: July 29, 2013, 11:37:57 AM »
You are confusing me... You seem to say that the inflation rate is a) based on what I personally buy and therefore a personal number, and b) based on the price you pay for whatever you buy.

If oil gets more expensive and electronics cheaper, I can only determine an inflation rate by looking at how much of each I buy. That's how I understood

Quote
"So has the overall value of a dollar increased or decreased?  Well that depends on how much oil you personally buy and how many electronics you buy."

That, however, means that by changing what I buy I'm also changing my personal inflation rate. If I stop buying electronics, my inflation rate increases, if I stop buying oil, inflation rate is going down. If inflation is dependent on my personal consumption, inflation changes by either changing the price, or my consumption.

#### dragoncar

• Walrus Stache
• Posts: 9800
• Registered member
##### Re: How do you save when inflation takes it all away?
« Reply #85 on: July 29, 2013, 11:58:16 AM »
You are confusing me... You seem to say that the inflation rate is a) based on what I personally buy and therefore a personal number, and b) based on the price you pay for whatever you buy.

If oil gets more expensive and electronics cheaper, I can only determine an inflation rate by looking at how much of each I buy. That's how I understood

Quote
"So has the overall value of a dollar increased or decreased?  Well that depends on how much oil you personally buy and how many electronics you buy."

That, however, means that by changing what I buy I'm also changing my personal inflation rate. If I stop buying electronics, my inflation rate increases, if I stop buying oil, inflation rate is going down. If inflation is dependent on my personal consumption, inflation changes by either changing the price, or my consumption.

You could do it that way, but I wouldn't.  I'd ignore past consumption habits and look at changes in the price of goods I currently buy.  Obviously one month is too short a time span to characterize "what you buy" unless you amortize the cost of durable goods over each month (e.g., I buy a computer every 5 years, current price of a computer is \$X, so this month computers contribute \$X/(5*12) to my CPI)

Edit: Put another way, if I bought a BMW last year and a honda this year, I would say my personal CPI currently includes hondas.  If hondas have increased in price since last year, that's a CPI increase even though I spent less on the honda than I did on the BMW.
« Last Edit: July 29, 2013, 12:02:09 PM by dragoncar »

#### Jamesqf

• Magnum Stache
• Posts: 4047
##### Re: How do you save when inflation takes it all away?
« Reply #86 on: July 29, 2013, 12:32:19 PM »
It's not like measuring inflation as "the value of money" obviates this issue.  For example, lets say the price of oil increases and the price of electronics decreases.  Therefore, the value of a dollar has decreased in barrels of oil and has increased in hard drives.  So has the overall value of a dollar increased or decreased?  Well that depends on how much oil you personally buy and how many electronics you buy.  Hence, personal CPI.

But you're still missing the point, which is that there are two (or three, as Cristof pointed out) factors that go into your personal CPI/Cost of Living.  [ol]
• Price of goods, varying according to supply & demand
• How much of each good you personally use
• The value of the money you use to buy stuff with
[/ol]

So let's pretend that the first two don't change, say you're an anchorite who lives on a loaf of bread per day.  Now back in 1963, you could buy a loaf of bread for 22 cents.  Today it's \$2.20.  (And no, I didn't pick that example specifically, I just did a search for prices and am as surprised as you that it comes out to a nice even number.)  So in 1963 you tucked an envelope with 11 \$20 bills under your rock and forgot about it until just now.  In 1963, you could have gotten 1000 loaves of bread for that money; today you get only 100.  But nothing much has changed in farming or bread-making.  The only thing that has changed is the value of those \$20 bills.

I agree that it's often a problem for us ordinary mortals to separate out the exact causes of any particular price change.  It's also tempting, for a lot of reasons, to attribute some changes, like the price of gas, to inflation rather than supply & demand.  But if you really think about what's going on, it just doesn't make sense any other way.

#### jrhampt

• Handlebar Stache
• Posts: 1694
• Age: 44
• Location: Connecticut
##### Re: How do you save when inflation takes it all away?
« Reply #87 on: July 29, 2013, 12:57:20 PM »
This is an easy one - you buy things that inflate.  For me, that's stocks in general.  If you're worried about overinflation in certain sectors, invest in those sectors.  For example, healthcare is probably a good sector to invest in.

#### Jamesqf

• Magnum Stache
• Posts: 4047
##### Re: How do you save when inflation takes it all away?
« Reply #88 on: July 29, 2013, 02:18:28 PM »
Yes.  Just for example, the price (adjusted for dividends & stock splits) of a share of IBM in 1963 was about \$2, now it's close to \$200/share (\$196.21 at the moment.)  Of course the problem is choosing the right stocks...

#### jrhampt

• Handlebar Stache
• Posts: 1694
• Age: 44
• Location: Connecticut
##### Re: How do you save when inflation takes it all away?
« Reply #89 on: July 29, 2013, 02:23:36 PM »
Right, and I should clarify that I don't generally pick stocks, either; I just assume the S&P index will inflate and stick to that.  I am weighted toward the healthcare sector due to company stock bonuses, not necessarily by choice, but it's been working well so far.

#### worms

• Bristles
• Posts: 382
##### Re: How do you save when inflation takes it all away?
« Reply #90 on: July 29, 2013, 02:24:40 PM »

But nothing much has changed in farming or bread-making.
Except that wheat yields have more than doubled in that period!

I appreciate that the example is illustrative only and I don't want to detract from the more relevant point that you are making, I just get hacked off when people underestimate just how much  agricultural production has changed  in the last 50 years.

#### mpbaker22

• Handlebar Stache
• Posts: 1095
##### Re: How do you save when inflation takes it all away?
« Reply #91 on: July 29, 2013, 03:09:20 PM »

But nothing much has changed in farming or bread-making.
Except that wheat yields have more than doubled in that period!

I appreciate that the example is illustrative only and I don't want to detract from the more relevant point that you are making, I just get hacked off when people underestimate just how much  agricultural production has changed  in the last 50 years.

I assume that's probably yield per acre, correct?  But I would think there's probably an increased cost associating with getting that extra yield.  GMO seed, fertilizer, better irrigation, etc. all carry higher costs than not using them.

#### dragoncar

• Walrus Stache
• Posts: 9800
• Registered member
##### Re: How do you save when inflation takes it all away?
« Reply #92 on: July 29, 2013, 04:01:51 PM »
It's not like measuring inflation as "the value of money" obviates this issue.  For example, lets say the price of oil increases and the price of electronics decreases.  Therefore, the value of a dollar has decreased in barrels of oil and has increased in hard drives.  So has the overall value of a dollar increased or decreased?  Well that depends on how much oil you personally buy and how many electronics you buy.  Hence, personal CPI.

But you're still missing the point, which is that there are two (or three, as Cristof pointed out) factors that go into your personal CPI/Cost of Living.  [ol]
• Price of goods, varying according to supply & demand
• How much of each good you personally use
• The value of the money you use to buy stuff with
[/ol]

So let's pretend that the first two don't change, say you're an anchorite who lives on a loaf of bread per day.  Now back in 1963, you could buy a loaf of bread for 22 cents.  Today it's \$2.20.  (And no, I didn't pick that example specifically, I just did a search for prices and am as surprised as you that it comes out to a nice even number.)  So in 1963 you tucked an envelope with 11 \$20 bills under your rock and forgot about it until just now.  In 1963, you could have gotten 1000 loaves of bread for that money; today you get only 100.  But nothing much has changed in farming or bread-making.  The only thing that has changed is the value of those \$20 bills.

I agree that it's often a problem for us ordinary mortals to separate out the exact causes of any particular price change.  It's also tempting, for a lot of reasons, to attribute some changes, like the price of gas, to inflation rather than supply & demand.  But if you really think about what's going on, it just doesn't make sense any other way.

I get what you are saying, I just think you are wrong.  The value of money and the price of goods are not separate factors.  Money is a good subject to supply and demand.

#### Jamesqf

• Magnum Stache
• Posts: 4047
##### Re: How do you save when inflation takes it all away?
« Reply #93 on: July 29, 2013, 05:29:36 PM »

But nothing much has changed in farming or bread-making.
Except that wheat yields have more than doubled in that period!

I appreciate that the example is illustrative only and I don't want to detract from the more relevant point that you are making, I just get hacked off when people underestimate just how much  agricultural production has changed  in the last 50 years.

Sure.  That's really the problem, because nothing is absolutely constant.  Everything changes all the time (that's why there are e.g. commodity futures markets), and there's no one fixed standard of comparison.  Not even a gold standard, much as the gold bugs would like to convince us otherwise.

But I think it's useful to ask why average prices - the CPI, COLA, or whatever you call it - should always keep on rising, when a naive person would think that the price of most things should, like wheat or electronics, gradually decline due to improved yields & more efficient production methods.  (While some others, like oil or land, would rise because of scarcity.)

The value of money and the price of goods are not separate factors.  Money is a good subject to supply and demand.

Which is pretty much what I've been trying to say.  You can view money as a good, or as the symbol system for all goods in the economy.  So if at time T there is a 1:1 relationship of money to goods, then at T+1 the money-regulating authority (call it the Federal Reserve Board) creates extra symbols (that is, increases the supply of money), it seems obvious (to me, anyway) that the increase in supply would dilute the value of the existing money stock, causing inflation.

#### dragoncar

• Walrus Stache
• Posts: 9800
• Registered member
##### Re: How do you save when inflation takes it all away?
« Reply #94 on: July 29, 2013, 07:08:20 PM »

But nothing much has changed in farming or bread-making.
Except that wheat yields have more than doubled in that period!

I appreciate that the example is illustrative only and I don't want to detract from the more relevant point that you are making, I just get hacked off when people underestimate just how much  agricultural production has changed  in the last 50 years.

Sure.  That's really the problem, because nothing is absolutely constant.  Everything changes all the time (that's why there are e.g. commodity futures markets), and there's no one fixed standard of comparison.  Not even a gold standard, much as the gold bugs would like to convince us otherwise.

But I think it's useful to ask why average prices - the CPI, COLA, or whatever you call it - should always keep on rising, when a naive person would think that the price of most things should, like wheat or electronics, gradually decline due to improved yields & more efficient production methods.  (While some others, like oil or land, would rise because of scarcity.)

The value of money and the price of goods are not separate factors.  Money is a good subject to supply and demand.
[/quoteb

Which is pretty much what I've been trying to say.  You can view money as a good, or as the symbol system for all goods in the economy.  So if at time T there is a 1:1 relationship of money to goods, then at T+1 the money-regulating authority (call it the Federal Reserve Board) creates extra symbols (that is, increases the supply of money), it seems obvious (to me, anyway) that the increase in supply would dilute the value of the existing money stock, causing inflation.

Does CPI always go up?  It certainly doesn't have to.  But that's why personal CPI is better.  My personal CPI can go down if, for example, I refinance my mortgage at a lower rate and that saving outweighs the increase in corn prices due to bad weather (or whatever).  This is way more useful than telling me my money is now worth less (even though it now takes less of my money to consume the exact same things) just because the fed exchanged one form of confetti (money) for a promise to pay confetti in the future (bonds).

#### mpbaker22

• Handlebar Stache
• Posts: 1095
##### Re: How do you save when inflation takes it all away?
« Reply #95 on: July 29, 2013, 08:09:41 PM »

But nothing much has changed in farming or bread-making.
Except that wheat yields have more than doubled in that period!

I appreciate that the example is illustrative only and I don't want to detract from the more relevant point that you are making, I just get hacked off when people underestimate just how much  agricultural production has changed  in the last 50 years.

Sure.  That's really the problem, because nothing is absolutely constant.  Everything changes all the time (that's why there are e.g. commodity futures markets), and there's no one fixed standard of comparison.  Not even a gold standard, much as the gold bugs would like to convince us otherwise.

But I think it's useful to ask why average prices - the CPI, COLA, or whatever you call it - should always keep on rising, when a naive person would think that the price of most things should, like wheat or electronics, gradually decline due to improved yields & more efficient production methods.  (While some others, like oil or land, would rise because of scarcity.)

The value of money and the price of goods are not separate factors.  Money is a good subject to supply and demand.

Which is pretty much what I've been trying to say.  You can view money as a good, or as the symbol system for all goods in the economy.  So if at time T there is a 1:1 relationship of money to goods, then at T+1 the money-regulating authority (call it the Federal Reserve Board) creates extra symbols (that is, increases the supply of money), it seems obvious (to me, anyway) that the increase in supply would dilute the value of the existing money stock, causing inflation.

I think there's a general agreement - Whatever we are spending, the change in the cost of those products year to year is what is important.  I think the different is in what terms are used to describe that change.

Inflation would be the change in prices due to the value of money from year to year.  CPI is a measure of inflation because it attempts to measure the change in prices from year to year.  However, some of these price changes are due to changes in supply and demand.  This is where CPI is a very imperfect indicator.

However, taken in aggregate, it is a pretty good measure of inflation.  Regardless, by calculating your own CPI, you might not be calculating inflation.  You will be calculating your change in costs from the previous year to the current year.

#### tomsang

• Handlebar Stache
• Posts: 1085
##### Re: How do you save when inflation takes it all away?
« Reply #96 on: July 29, 2013, 09:25:27 PM »
Whatever the number is doesn't matter if your balance sheet is set up to outperform inflation. My balance sheet will do very well with inflation as I am heavy with 30 year fixed mortgages, heavy equities and hard assets.

To me the trouble would be if we have a Japanese stagflation event, which I believe would be next to impossible with our national debt level, desirability of inflation, and the current ability to control our currency.

If you are afraid of inflation, then you should actively create a balance sheet that outperforms inflation.

Good luck!

#### Christof

• Pencil Stache
• Posts: 712
• Age: 46
• Location: Germany
##### Re: How do you save when inflation takes it all away?
« Reply #97 on: July 29, 2013, 10:43:37 PM »
To me the trouble would be if we have a Japanese stagflation event, which I believe would be next to impossible with our national debt level, desirability of inflation, and the current ability to control our currency.

Why? Even if you bought Japanese shares at the all time high of the Nikkei, you would still be part-owner of companies that pay yearly dividends. It's not like Sony, Toshiba, Toyota, etc. have suddenly stopped producing 25 years ago, nor would US companies suddenly cease to exist.

#### tomsang

• Handlebar Stache
• Posts: 1085
##### Re: How do you save when inflation takes it all away?
« Reply #98 on: July 29, 2013, 11:08:42 PM »

Why? Even if you bought Japanese shares at the all time high of the Nikkei, you would still be part-owner of companies that pay yearly dividends. It's not like Sony, Toshiba, Toyota, etc. have suddenly stopped producing 25 years ago, nor would US companies suddenly cease to exist.

Dang economic terms. I meant deflation.

Why is that bad? When you have fixed rate debt and assets, you want your assets to increase in value and the ability to pay your debt back in worthless currency. Deflation is the opposite of that.

With deflation, you would not want to own houses or assets and you would want to have ARMs for debt.

#### worms

• Bristles
• Posts: 382
##### Re: How do you save when inflation takes it all away?
« Reply #99 on: July 29, 2013, 11:09:06 PM »

Why? Even if you bought Japanese shares at the all time high of the Nikkei, you would still be part-owner of companies that pay yearly dividends. It's not like Sony, Toshiba, Toyota, etc. have suddenly stopped producing 25 years ago, nor would US companies suddenly cease to exist.

I guess this in part depends on whether you are holding shares for dividend yield or capital growth.  Most of my stocks do reasonably in terms of both, but I have one stock that is a really good safe dividend stock, yet has a share price that is falling way behind its sector.  I am holding in the vain hope that it will catch up (analysts are divided on this!) but meantime it at least continues to pay a good dividend which is well within its earnings.