Author Topic: Good short read on inflation numbers  (Read 1255 times)

ChpBstrd

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Good short read on inflation numbers
« on: April 13, 2021, 08:40:17 PM »
Slate is not known for quality economic commentary, but this is the only place I've seen some context put on the inflation numbers released today.

https://slate.com/business/2021/04/inflation-is-about-to-look-freaky.html

Quote
If prices didnít rise at all in the coming months (unlikely, but bear with me), the governmentís inflation gauge will go up by 2 percent in March, 2.7 percent in April, and 2.8 percent in May, on a year-over-year basis. If the Fed is actually on target to hit its 2 percent medium-term average inflation target, the year-over-year CPI numbers will be 2.2 percent for March, then 3.1 percent for April, then 3.5 percent for May. In other words, it will look high, but it will really just be on its way back to normal.

Everywhere else I've looked makes no mention of the disinflation / deflation we experienced 12 months ago, and how that affects numbers calculated on a trailing 12 months basis and will continue affecting them for a while. They're just reporting that "everything is getting more expensive!". Thought this would be a good perspective for mustachians to consider amid the breathless headlines.

reeshau

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Re: Good short read on inflation numbers
« Reply #1 on: April 14, 2021, 06:29:56 AM »
This is similar to how P/E's, aka trailing P/E's, and many other numbers will look.  A great excuse to think more long-term, and be more forward-looking with investments.

MustacheAndaHalf

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Re: Good short read on inflation numbers
« Reply #2 on: April 14, 2021, 09:02:09 AM »
For those viewing stock performance, I'd recommend viewing the 2 year history rather than 1 year history.  Like iShares Total Stock Market ETF (ITOT), which gained +53.5% in 12 months, and 44.5% in 24 months.

better late

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Re: Good short read on inflation numbers
« Reply #3 on: April 14, 2021, 09:46:34 AM »
Slate is not known for quality economic commentary, but this is the only place I've seen some context put on the inflation numbers released today.

https://slate.com/business/2021/04/inflation-is-about-to-look-freaky.html

Quote
If prices didnít rise at all in the coming months (unlikely, but bear with me), the governmentís inflation gauge will go up by 2 percent in March, 2.7 percent in April, and 2.8 percent in May, on a year-over-year basis. If the Fed is actually on target to hit its 2 percent medium-term average inflation target, the year-over-year CPI numbers will be 2.2 percent for March, then 3.1 percent for April, then 3.5 percent for May. In other words, it will look high, but it will really just be on its way back to normal.

Everywhere else I've looked makes no mention of the disinflation / deflation we experienced 12 months ago, and how that affects numbers calculated on a trailing 12 months basis and will continue affecting them for a while. They're just reporting that "everything is getting more expensive!". Thought this would be a good perspective for mustachians to consider amid the breathless headlines.

I hadn't read anything about this either - helpful information!

cool7hand

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Re: Good short read on inflation numbers
« Reply #4 on: April 15, 2021, 08:36:00 AM »
Thanks for sharing!

tooqk4u22

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Re: Good short read on inflation numbers
« Reply #5 on: April 15, 2021, 11:02:48 AM »
Slate is not known for quality economic commentary, but this is the only place I've seen some context put on the inflation numbers released today.

https://slate.com/business/2021/04/inflation-is-about-to-look-freaky.html

Quote
If prices didnít rise at all in the coming months (unlikely, but bear with me), the governmentís inflation gauge will go up by 2 percent in March, 2.7 percent in April, and 2.8 percent in May, on a year-over-year basis. If the Fed is actually on target to hit its 2 percent medium-term average inflation target, the year-over-year CPI numbers will be 2.2 percent for March, then 3.1 percent for April, then 3.5 percent for May. In other words, it will look high, but it will really just be on its way back to normal.

Everywhere else I've looked makes no mention of the disinflation / deflation we experienced 12 months ago, and how that affects numbers calculated on a trailing 12 months basis and will continue affecting them for a while. They're just reporting that "everything is getting more expensive!". Thought this would be a good perspective for mustachians to consider amid the breathless headlines.

That concept is the foundation of the Fed's transitory narrative due disinflation when the pandemic started combined with high inflation caused by supply/demand imbalances that are likely temporary in nature.   This is a correct argument but I thing the narrative is stretching further than the reality...i.e. inflation will continue to be a bit higher than we have all been accustomed to.   

Also, the single month over last year comparison is less relevant than a year over year comparison but keep in mind that inflation was negative for April to may but then ran back up, moderated and is now running up again, energy and travel being contributors.

Date  inflation rate (month / annualized / Full YoY / ex food and energy)
1/20 = .1% / 1.2% / 2.5% / 2.3%
2/20 = 0.1 / 1.2% / 2.3% / 2.4%
3/20 = -0.8% / -9.6% / 1.5% / 2.1%
4/20 = -0.4% / -4.8% / 0.3% / 1.4%
5/20 = -.1% / -1.2% / 0.1% / 1.2%
6/20 = 0.6 / 7.2% / 0.6% / 1.2%
7/20 = 0.6 / 7.2% / 1.0% / 1.6%
8/20 = 0.4 / 4.8% / 1.3% / 1.7%
9/20 =  0.2% / 2.4% / 1.4% / 1.7%
10/20 = 0.0% / 0.0% / 1.2% / 1.6%
11/20 = 0.2% / 2.4% / 1.2% / 1.6%
12/20 = 0.4% / 4.8% / 1.4% / 1.6%
1/21 = 0.3% / 3.6% / 1.4% / 1.4%
2/21 = 0.4% / 4.8% / 1.7% / 1.3%
3/21 = 0.6% / 7.2% / 2.6% / 1.6%

So from. This data it is clear that there has been and is inflation that os lower than the Fed's target but is trending higher and not because of disinflation from a year ago....the YoY numbers refute that now.  Guess the question is whether or not it will indeed be transitory bc if not the Fed will have to act sooner and that will whack the markets.

windytrail

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Re: Good short read on inflation numbers
« Reply #6 on: April 15, 2021, 11:50:15 AM »
This forum has been talking about inflation a lot recently, but I am confused why it is relevant for us Mustachians. For example, what actions are you taking now as a result of your expectations about inflation? And how does it differ from the strategy of many of us here, i.e. dumping all our savings into index funds?

Whether inflation is 1% or 5% doesn't seem to affect my strategy in the accumulation phase, or am I missing something?

dougules

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Re: Good short read on inflation numbers
« Reply #7 on: April 15, 2021, 12:02:15 PM »
This forum has been talking about inflation a lot recently, but I am confused why it is relevant for us Mustachians. For example, what actions are you taking now as a result of your expectations about inflation? And how does it differ from the strategy of many of us here, i.e. dumping all our savings into index funds?

Whether inflation is 1% or 5% doesn't seem to affect my strategy in the accumulation phase, or am I missing something?

The worst case scenario for SWR in historical data was not from a crash in nominal dollars, but from inflation in the 1970s.  Inflation is possibly a bigger risk in terms of sequence-of-returns than an outright crash.    I don't think it's necessarily relevant for us unless there's some reason to believe it will be worse than the stagflation of the 1970s, although it is another reminder not to hold much cash. 

ChpBstrd

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Re: Good short read on inflation numbers
« Reply #8 on: April 15, 2021, 12:37:37 PM »
This forum has been talking about inflation a lot recently, but I am confused why it is relevant for us Mustachians. For example, what actions are you taking now as a result of your expectations about inflation? And how does it differ from the strategy of many of us here, i.e. dumping all our savings into index funds?

Whether inflation is 1% or 5% doesn't seem to affect my strategy in the accumulation phase, or am I missing something?

Suppose my expenses are $50k. My FIRE number today per the 4% rule is $1,250,000.

If I'm 5 years from retirement, so my expenses will likely be more than $50k by the time of my retirement. Thus my FIRE number will be higher. For example, if my expenses in 5 years increase to $60k, I will look at my $1,250,000 stash and realize I have less than 25x and need to keep working until I hit $1,500,000.

If my combined savings and return on investment is low enough*, it is possible that inflation keeps moving my goalposts faster than I can accumulate money, and thus I never retire. A 5% increase in a $60k cost of living, for example, would add $75,000 to my FIRE number. If I earned/saved $75k that year, I am no closer to retirement.

Additionally - low returns are more likely than high returns to accompany high inflation. So if high inflation occurs, it will be very hard to get over the hump and retire. This is all a good case for high savings rates, short career durations, aggressive allocations, low WRs, and strict budget controls.

*specifically, less than 25 times the increase in my spending.

clarkfan1979

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Re: Good short read on inflation numbers
« Reply #9 on: April 15, 2021, 01:31:54 PM »
This forum has been talking about inflation a lot recently, but I am confused why it is relevant for us Mustachians. For example, what actions are you taking now as a result of your expectations about inflation? And how does it differ from the strategy of many of us here, i.e. dumping all our savings into index funds?

Whether inflation is 1% or 5% doesn't seem to affect my strategy in the accumulation phase, or am I missing something?

If inflation is 1%, my strategy doesn't change. If inflation is 5%, I'm going to force myself to buy more rental real estate.

dougules

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Re: Good short read on inflation numbers
« Reply #10 on: April 15, 2021, 03:34:15 PM »
This forum has been talking about inflation a lot recently, but I am confused why it is relevant for us Mustachians. For example, what actions are you taking now as a result of your expectations about inflation? And how does it differ from the strategy of many of us here, i.e. dumping all our savings into index funds?

Whether inflation is 1% or 5% doesn't seem to affect my strategy in the accumulation phase, or am I missing something?

Suppose my expenses are $50k. My FIRE number today per the 4% rule is $1,250,000.

If I'm 5 years from retirement, so my expenses will likely be more than $50k by the time of my retirement. Thus my FIRE number will be higher. For example, if my expenses in 5 years increase to $60k, I will look at my $1,250,000 stash and realize I have less than 25x and need to keep working until I hit $1,500,000.

If my combined savings and return on investment is low enough*, it is possible that inflation keeps moving my goalposts faster than I can accumulate money, and thus I never retire. A 5% increase in a $60k cost of living, for example, would add $75,000 to my FIRE number. If I earned/saved $75k that year, I am no closer to retirement.

Additionally - low returns are more likely than high returns to accompany high inflation. So if high inflation occurs, it will be very hard to get over the hump and retire. This is all a good case for high savings rates, short career durations, aggressive allocations, low WRs, and strict budget controls.

*specifically, less than 25 times the increase in my spending.

Companies' valuations should eventually adjust with inflation since they should be able to up the price of their products.  Also over the long run inflation should mean you can get higher pay in nominal terms.  Of course the real world is more complicated than that, but the general idea is that inflation shouldn't make FIRE something you can never catch up to.

PDXTabs

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Re: Good short read on inflation numbers
« Reply #11 on: April 15, 2021, 05:43:26 PM »
This forum has been talking about inflation a lot recently, but I am confused why it is relevant for us Mustachians. For example, what actions are you taking now as a result of your expectations about inflation? And how does it differ from the strategy of many of us here, i.e. dumping all our savings into index funds?

Whether inflation is 1% or 5% doesn't seem to affect my strategy in the accumulation phase, or am I missing something?

Well, if inflation got to 5% all of your bond portfolio would be horribly devalued. EDIT - well maybe not TIPS.
« Last Edit: April 15, 2021, 07:07:46 PM by PDXTabs »