7Y, ARS, thanks for putting together another thought-provoking show.
I have a follow up question regarding “personal rates of inflation.” ARS, my understanding of your argument is: no matter what your personal basket of goods is, even if it excludes items like SUVs, walk-in cigar humidors, and daily trips to Ruth's Chris Steakhouse, you're still paying for
something every year, and that something is going to rise in cost year-over-year. In other words, it's not one's initial starting point that matters, it's the rate at which prices increase thereafter. Is that right?
That makes sense to me, but it also seems like the whole reason that the BoL uses a
basket of goods, though, is that
different items exhibit different rates of inflation. For instance, table 26 on page 85 of the
BoL Nov 2015 CPI report indicates that overall medical costs for an urban consumer went up by 3.2, 2.0 and 3.0 percent in 2012, 2013, and 2014. Average entertainment costs, however, went up by 0.8, 0.4, and 0.0 percent during the same time periods.
Now, a full-on Mustachian will likely use the library a lot more than a consumer, and entertainment might hence make up a negligible portion of said person’s portfolio. If that person still has average or above-average health-care costs, that individual’s
personal inflation rate might thus be higher (or at least different) than that of a typical consumer.
Granted, over the long term, the relative inflation rate for items in a given basket will vary over time, and very high relative inflation rates must eventually taper (otherwise, you end up with absurd conclusions like health care making up 99.99% of an average middle-aged person’s yearly budget in N years). Still I think one can argue that over say, 30 years, some basket components will nonetheless have higher inflation rates than others *.
All of this leads me to believe that there’s value in being able to calculate one’s personal rate of inflation (and perhaps make corresponding corrections to back-testing tools like cfiresim).
What do you think?
* Whether we can predict who the winners and losers will be is another question, but I still feel that broad, very rough predictions can be made – similar to the way one can say that stocks should outperform bonds over the long term.
ETA: Thanks for the pointer to
http://portfoliocharts.com/. That's an amazing tool.