Mustachians aren't as subject to inflation

[Zikoris]

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.

These are my thoughts exactly. The only data I have to work with is my own four years of Mint records. My expenses have not increased over that time - they've actually gone down, though this year will be a bit higher than last (couple hundred-ish) due to starting ballet training, which is hella-pricey. But four years really isn't a lot of time to go by. Incomplete data! Argh.

[Prairie Stash]

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

I'm glad I could mention electronics, it's one of the most easily understood parts of inflation, I find food too cyclical. I appreciate you taking time for this ARS.

I didn't care for your argument. It uses lifestyle inflation to prove personal inflation. I agree 100% that electronics makes up a smaller part of my budget than a normal consumer, that's a valid point.

I'll try a different tack for fun. With the hypersensitivity Mustachians display to expenditures I propose they are more likely than average to adjust to prices. Where an average person accepts inflation as a normal occurrence Mustachians adjust how they spend.

As an anecdote common to many people my bank increased its fees this year. I took action to keep my fees at $0, however my bank has seen increased profit from Non-Mustachians (I own stock, it's nice). Normal people don't seem to care about $4/month, to me it was an outrage ;) it's the normal review of budget items helping keep my inflation low.

I bet you too have adjusted your cellular habits, cable and other expenses to maintain a status quo even as the providers increased fees over the past decade. If you've kept them steady you've been actively attempting to beat inflation. Please note it's a continuum, I don't think its possible to achieve 0% over a lifetime, my goal is to hit lower inflation than average.

[arebelspy]

Oh boy. Maybe someone else can tackle the last few posts. :)

[Villanelle]

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.

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.

A

But you do buy used vehicles, occasionally.  And since you are likely spending slightly more on maintenance than those people who buy a new vehicle every 3 years.  What it the cost of brake pads increases faster than average inflation?   Since you own rather than rent, you will likely be buying a new roof and water heater at some point.  What about those costs?

You don't drink alcohol, and that's 5% of the food category.  What if actual food goes up 10% and alcohol only 2%?  Your grocery budget would actually be *more* affected by inflation.  Of course those numbers could be switched, but that's sort of the point.  No one knows.  Your spending is distributed differently than the CFI. So it is somewhat reasonable to assume that your inflation rate might differ slightly.  But the direction in which it differs is still unknowable. 

Your post almost makes it sound like because you don't have a dog and don't drink beer, you are somehow exempt from a portion of inflation.  You still currently spend $200/mo on groceries (or whatever).  Your $200 might be a slightly different breakdown than someone else's $200 (or their $275 which includes alcohol and prepared foods).  But it will still increase by a certain percentage.  Whether that percentage is higher, lower, or about the same as the $275 that includes things you don't buy is something we can't predict.  But your $200 is still just as subject to inflation as his $275.  Then repeat that logic with plumbing costs on your house, spark plug for your car, new hiking boots for your hiking hobby (vs pets and TVs), and everything else.

You are still just as  subject to inflation, as a total % of spending, as the money spendypants person out there.  The overall dollar amount will be less because it is a % of a smaller overall budget, but the % still exists and there's no reason to believe it will be smaller.

-----

Arguments about adjusting are different arguments.  That's saying that mustachians are more adaptable and will be able to adjust and buy soy milk if the price of cow's milk goes up dramatically.  I agree with that.  But that doesn't mean mustachians are less subject to inflation.  It means they are, perhaps, better equipped to deal with it.  I'm not entirely sure I buy that argument as, given that most of us have budgets that are trimmed more than average, there may be less fat to cut if things get sporty with regard to overall inflation. I'm not sure how much buying different milk is going to help when it is a matter of shaving off a few pennies and maybe a percent or two on milk.  But I suppose it is true that adaptable people are going to be better at making some changes.

[arebelspy]

Villanelle!!

 

[Zikoris]

How many years of data do you guys think a person needs to get an accurate picture of how inflation is affecting them? Assuming they've past the point of making major Mustachian lifestyle changes - so they've already downsized the home/car/wasteful spending, etc. I'm up to four, but feel like that's not quite enough yet to be meaningful.

[arebelspy]

Two decades, IMO, would come close to being sufficient. But the problem is that costs shift in categories as you age, so even that data may not do it.

[Zamboni]

I agree that inflation is one of the biggest risks of RE.

I've had friends in other countries (Russia, China, Argentina) rapidly lose buying power for basics like food due to sudden, destabilizing inflation. Russia was the worst situation where I've known someone personally who lived through it . . . and her whole goal became to get somewhere with more stable currency!

We can make ourselves feel better by the la-la-land of recent very low inflation in the US and Canada, but could something happen to spin it all out of control? Of course. For example, if the price of oil flew up off the charts suddenly, then the price of food would also go up dramatically just due to transportation of the food to the markets. All kinds of other things could go wrong (massive crop failures, pandemics, etc.) I try not to think about it too much. I prefer la-la-land with a big cushion if I'm wrong.

In the original YMOYL, they make an argument that inflation doesn't really matter, but I think it is obviously flawed. True, to some extent there is deflation in certain items such as technology improves (my iphone3 last year cost me about the same as my corded phone cost me in 1988) IF you are willing to buy used and use old technology, and that was their argument. Basically, if you are willing to ride a very old bike, then you can always find a cheap bike. But others here made a good point: food, medicine, maintenance items . . . we are very vulnerable to inflation in these items.

[Rural]

Two decades, IMO, would come close to being sufficient. But the problem is that costs shift in categories as you age, so even that data may not do it.

 I don't think two decades would do it, not because that wouldn't be great data to have, but because inflation cycles seem to run about twice that. At least, the really big inflation cycles do. I hope that trend continues!

[APowers]

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.

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.

A

But you do buy used vehicles, occasionally.  And since you are likely spending slightly more on maintenance than those people who buy a new vehicle every 3 years.  What it the cost of brake pads increases faster than average inflation?   Since you own rather than rent, you will likely be buying a new roof and water heater at some point.  What about those costs?

You don't drink alcohol, and that's 5% of the food category.  What if actual food goes up 10% and alcohol only 2%?  Your grocery budget would actually be *more* affected by inflation.  Of course those numbers could be switched, but that's sort of the point.  No one knows.  Your spending is distributed differently than the CFI. So it is somewhat reasonable to assume that your inflation rate might differ slightly.  But the direction in which it differs is still unknowable. 

Your post almost makes it sound like because you don't have a dog and don't drink beer, you are somehow exempt from a portion of inflation.  You still currently spend $200/mo on groceries (or whatever).  Your $200 might be a slightly different breakdown than someone else's $200 (or their $275 which includes alcohol and prepared foods).  But it will still increase by a certain percentage.  Whether that percentage is higher, lower, or about the same as the $275 that includes things you don't buy is something we can't predict.  But your $200 is still just as subject to inflation as his $275.  Then repeat that logic with plumbing costs on your house, spark plug for your car, new hiking boots for your hiking hobby (vs pets and TVs), and everything else.

You are still just as  subject to inflation, as a total % of spending, as the money spendypants person out there.  The overall dollar amount will be less because it is a % of a smaller overall budget, but the % still exists and there's no reason to believe it will be smaller.

Yes, I'm still subject to inflation. I'm not disagreeing with that point of fact. I'm just saying that if we asked the question: "If I'm not a normal consumer, what inflation rate is applicable to me?" The relevant data IS available, and the "direction in which [my inflation rate] differs" from the norm IS knowable. I'm just too lazy to search through the sheaves of spreadsheets to compile the data. It'd be nice if someone in the gov't put together a nice interface for finding the inflation rate of an individualized market basket of goods *wishful thinking*.

ETA: Found this website, and decided to browse a few of the tables. You had mentioned used cars vs new cars; going back as far as I could, the (annualized) inflation rate for used is 10.6%, while new is 17.5%. I'd be subject to the lower rate, buying used. Then, just for fun, I looked at food. Restaurant inflation: 11.3%, food staples (rice/potatoes/etc., what they had listed in that front page table): under 4%. Unfortunately, the tables don't all go back 100 years, so I could only go back as far as they had data.

[arebelspy]

Yeah, I see what you're saying. Hard to predict still, IMO, because the categories you do use could inflate faster or slower in the future than they have in the past. But it would be interesting to look at.

[JZinCO]

Resurrection to share a conversation A Rebel Spy had on radical personal finance.
(also a find shout out to Tyler's portfolio charts).

I don't mean to restart the back and forth but if there are any forum readers that found this thread interesting and want more depth, listen here:
http://radicalpersonalfinance.com/277-early-retirement-faqs-plan-inflation-interview-joe-aka-arebelpsy-just-retired-30-schoolteachers-salary/

[FiveSigmas]

Folding in a conversation I started from here (I think APowers nails here the argument I was trying to make over there).

Yeah, I see what you're saying. Hard to predict still, IMO, because the categories you do use could inflate faster or slower in the future than they have in the past. But it would be interesting to look at.

To a certain extent, we already do this sort of prediction all the time on this forum. For instance, back-testing tools like CFireSim look at past values of various asset classes (e.g. stocks and bonds) to make predictions about how likely a given asset allocation will succeed in the future -- and they also factor in CPI. What if we could crack open the CPI time-series and replace it with one that attempted to model what our own personal spending might have been over that same historical time-period (or even just tried to model chained-CPI -- which admittedly didn't exist prior to 2002)? That would be another data-point that I would find valuable.

Of course, there are limits to all of this (and to back-testing tools in general). One can't really know what one would have done in 1942 with a war raging and food and gas rationing (GCC excepted), but I think we've already swallowed that pill as soon as we start using back-testing tools.

Would I make any decisions that impacted the rest of my life solely off such data? Of course not. Would it be valuable? I think it could be.

A more tongue-in-cheek comment: Markets already make predictions of what the CPI will be over the next 30 years (witness the spread between treasuries and TIPS). If they can make that kind of prediction, why can't we predict our own personal inflation rate? :-p

[DrF]

So... how does the early retiree protect against inflation?
1) Hold fixed long term debt (fixed rate 30yr mortgage) and save your money in stocks instead of paying down principal
2) Use technology to reduce costs (more efficient heating, cooling, power supply for your home)
3) Buy less/substitute items that tend to go up with or faster than inflation (gasoline, college tuition, health care)
4) Own investments which outpace inflation (stocks, especially value and international)

Or, what about saving an additional 3-4% in net worth before you retire? For example, if your yearly spend is $40k, then you'd need $1MM in assets to retire. But, if you wanted to protect against inflation why not just save an additional $40k? That 4% buffer should protect against average inflation increases over the course of your entire retirement. Ahhh, but then all the hardcore mustachians will say "that's 1 whole year of expenses that I could have used to retire a year earlier, and I wanna retire now!!!" But, you're not going to have to work a whole extra year to save that additional 4%, in all likelihood it would only take a few more months, and then you could retire feeling confident that inflation would not erode your nest egg.

[frugalnacho]

How many years of data do you guys think a person needs to get an accurate picture of how inflation is affecting them? Assuming they've past the point of making major Mustachian lifestyle changes - so they've already downsized the home/car/wasteful spending, etc. I'm up to four, but feel like that's not quite enough yet to be meaningful.

Decades.  A much better indication would be taking a basket of the most commonly purchased goods, tracking their price changes each year, and using it as a proxy for the entire economy.  It's surprisingly accurate, despite what half the people in this thread are claiming.

You only have 4 years worth of data, and you don't buy everything in the CPI index.  Some things jump up and down, and your personal inflation may be different than everyone else's for any given year, but in the end it will all work out.  If you subsist entirely on eggs you've probably had a wild ride with your inflation flying up and down over just a few years. 

Some things that you mentioned are not surprising, like your internet and phone bills not increasing.  Those are things that should decrease in real terms because of technological advances.  Same thing with computers.  As new technology makes it easier and cheaper to create faster and better computers the real price goes down.  I can purchase a good computer for less than a days wages, something that was certainly not true 10 or 20 years ago.  I suspect that in another 10 years the cost of a computer with the equivalent computing power I could purchase today will be a trivial sum of money.  But as others have pointed out, this advantage will likely be mitigated by purchasing even more computers for even more functions.

Aside from computers and internet access though I have a hard time believing some of you won't experience inflation.  Do you seriously think your clothes, food, utilities, bike tubes, hiking boots, garden hoses, windows, cars, insurance, etc won't experience inflation? You expect to have the same budget for everything in 5 years? 10 years? 20 years?  You won't, all those things you buy will increase with inflation.

[Zikoris]

How many years of data do you guys think a person needs to get an accurate picture of how inflation is affecting them? Assuming they've past the point of making major Mustachian lifestyle changes - so they've already downsized the home/car/wasteful spending, etc. I'm up to four, but feel like that's not quite enough yet to be meaningful.

Decades.  A much better indication would be taking a basket of the most commonly purchased goods, tracking their price changes each year, and using it as a proxy for the entire economy.  It's surprisingly accurate, despite what half the people in this thread are claiming.

You only have 4 years worth of data, and you don't buy everything in the CPI index.  Some things jump up and down, and your personal inflation may be different than everyone else's for any given year, but in the end it will all work out.  If you subsist entirely on eggs you've probably had a wild ride with your inflation flying up and down over just a few years. 

Some things that you mentioned are not surprising, like your internet and phone bills not increasing.  Those are things that should decrease in real terms because of technological advances.  Same thing with computers.  As new technology makes it easier and cheaper to create faster and better computers the real price goes down.  I can purchase a good computer for less than a days wages, something that was certainly not true 10 or 20 years ago.  I suspect that in another 10 years the cost of a computer with the equivalent computing power I could purchase today will be a trivial sum of money.  But as others have pointed out, this advantage will likely be mitigated by purchasing even more computers for even more functions.

Aside from computers and internet access though I have a hard time believing some of you won't experience inflation.  Do you seriously think your clothes, food, utilities, bike tubes, hiking boots, garden hoses, windows, cars, insurance, etc won't experience inflation? You expect to have the same budget for everything in 5 years? 10 years? 20 years?  You won't, all those things you buy will increase with inflation.

Interestingly, we're now almost up to five years of data, so I can say definitively that our budgets have not experienced inflation for that time. It will be interesting to see how long that holds steady for, but so far so good.

[boarder42]

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.

No debt is incorrect.

As low interest fixed rate mortgages are actually fantastic inflation hedges

[Prairie Stash]

Aside from computers and internet access though I have a hard time believing some of you won't experience inflation.  Do you seriously think your clothes, food, utilities, bike tubes, hiking boots, garden hoses, windows, cars, insurance, etc won't experience inflation? You expect to have the same budget for everything in 5 years? 10 years? 20 years?  You won't, all those things you buy will increase with inflation.

A misconception is saying no inflation is the same as lower inflation. If the general society is experiencing an average of 3% inflation, as evidenced by the CPI basket, then some people will experience 1-5%, that's what averaging is about. Over the long term a very few will consistently be above and below, most will average out over the decades. I agree everyone will see inflation, I disagree that every single person will experience average inflation for their entire lives; there's always outliers when doing averages.

The question was do some people or groups of people experience lower than average and are mustachians one of those groups? In general groups that pay more attention to process see lower inflation due to substitution effect, high cost items get substituted with lower cost equivalent items; classically beef, pork, chicken are examples as they are all decent protein sources that are easily switched between (use apples, banana and oranges if you want, have you ever switched fruits due to seasonal price variations?). This leads to a time delay before inflation is felt, that marginal delay is captured in lower average costs over a decade.

Zikoris has captured the effect by substituting housing costs with lower price units. She will see price increases some day, but she's stretching it out over the next decade while her former neighbours saw rent increases already. If she was lazier her costs would have already gone up in accordance with inflation, instead she's proactive and delaying the cost increases.

[frugalnacho]

Interestingly, we're now almost up to five years of data, so I can say definitively that our budgets have not experienced inflation for that time. It will be interesting to see how long that holds steady for, but so far so good.

You can definitely say whatever you want, I disagree that that's accurate though.

I'm assuming you've tracked 2012, 2013, 2014, 2015, and almost all of 2016 now?  2012 is your baseline, so inflation during that year is irrelevant.  The years since (for Canada) are 0.94%, 1.91%, 1.13%, and 1.55% so far this year.  This compounds to only about a 5.6% total increase since you began tracking.  I would be astounded if you were not only able to keep track of spending in all categories down to the penny, but keep a full inventory of the quantity you purchase in each category as well.  You may have actually purchased 2% less lentils by weight than last year because you have become more efficient at utilizing them, or you may have substituted a slightly less expensive alternative a small percentage of the time.  I find it very hard to believe your grocery and cooking habits have literally not deviated in 5 years.  I'm not saying they need to change drastically, but I would bet I don't purchase the exact same quantity of each food item year in and year out.  The small amount of inflation Canada has experienced in the last few years would be completely lost in the noise and measurement error.

Also this:

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.

That is nearly 11% increase in 5 years, and is probably a significant portion of your budget.  You are absolutely experiencing inflation and just don't realize it.

EDIT: I just realized this post was almost a year old, so my information is shifted by a year. 

[Zikoris]

Interestingly, we're now almost up to five years of data, so I can say definitively that our budgets have not experienced inflation for that time. It will be interesting to see how long that holds steady for, but so far so good.

You can definitely say whatever you want, I disagree that that's accurate though.

I'm assuming you've tracked 2012, 2013, 2014, 2015, and almost all of 2016 now?  2012 is your baseline, so inflation during that year is irrelevant.  The years since (for Canada) are 0.94%, 1.91%, 1.13%, and 1.55% so far this year.  This compounds to only about a 5.6% total increase since you began tracking.  I would be astounded if you were not only able to keep track of spending in all categories down to the penny, but keep a full inventory of the quantity you purchase in each category as well.  You may have actually purchased 2% less lentils by weight than last year because you have become more efficient at utilizing them, or you may have substituted a slightly less expensive alternative a small percentage of the time.  I find it very hard to believe your grocery and cooking habits have literally not deviated in 5 years.  I'm not saying they need to change drastically, but I would bet I don't purchase the exact same quantity of each food item year in and year out.  The small amount of inflation Canada has experienced in the last few years would be completely lost in the noise and measurement error.

Also this:

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.

That is nearly 11% increase in 5 years, and is probably a significant portion of your budget.  You are absolutely experiencing inflation and just don't realize it.

EDIT: I just realized this post was almost a year old, so my information is shifted by a year.

I do actually track every category to the penny, though not the specific quantities of each item purchased. Our total yearly spending is definitely holding steady. It's just weird. Every year people tell me my costs are going to increase, and every year they stay the same.

[frugalnacho]

Aside from computers and internet access though I have a hard time believing some of you won't experience inflation.  Do you seriously think your clothes, food, utilities, bike tubes, hiking boots, garden hoses, windows, cars, insurance, etc won't experience inflation? You expect to have the same budget for everything in 5 years? 10 years? 20 years?  You won't, all those things you buy will increase with inflation.

A misconception is saying no inflation is the same as lower inflation. If the general society is experiencing an average of 3% inflation, as evidenced by the CPI basket, then some people will experience 1-5%, that's what averaging is about. Over the long term a very few will consistently be above and below, most will average out over the decades. I agree everyone will see inflation, I disagree that every single person will experience average inflation for their entire lives; there's always outliers when doing averages.

The question was do some people or groups of people experience lower than average and are mustachians one of those groups? In general groups that pay more attention to process see lower inflation due to substitution effect, high cost items get substituted with lower cost equivalent items; classically beef, pork, chicken are examples as they are all decent protein sources that are easily switched between (use apples, banana and oranges if you want, have you ever switched fruits due to seasonal price variations?). This leads to a time delay before inflation is felt, that marginal delay is captured in lower average costs over a decade.

Zikoris has captured the effect by substituting housing costs with lower price units. She will see price increases some day, but she's stretching it out over the next decade while her former neighbours saw rent increases already. If she was lazier her costs would have already gone up in accordance with inflation, instead she's proactive and delaying the cost increases.

Substitution doesn't mean you don't experience inflation, it just means you react and adjust.  It's like saying I normally spend $100k/yr, then 5% inflation happens so I reduce my spending by 5% and claim I don't experience inflation (whether I just stop going to the bar, or I substitute pork for beef, or I get my car washed slightly less often, etc).  I would absolutely experience inflation in that situation, even if I was able to maintain my $100k/yr budget. 

I also don't see how anyone thinks they are going to be consistently below inflation long term.  How is that possible or sustainable? Inflation erodes the value of the dollar and increases the cost of everything, even if some things are delayed behind other things. If the things you purchase don't experience inflation (or experience less than average inflation for very long periods) the logical conclusion is they would end up being free or virtually free, while other things would experience run away inflation.  I suspect supply and demand would self correct those situations and revert them to the mean.

[frugalnacho]

Interestingly, we're now almost up to five years of data, so I can say definitively that our budgets have not experienced inflation for that time. It will be interesting to see how long that holds steady for, but so far so good.

You can definitely say whatever you want, I disagree that that's accurate though.

I'm assuming you've tracked 2012, 2013, 2014, 2015, and almost all of 2016 now?  2012 is your baseline, so inflation during that year is irrelevant.  The years since (for Canada) are 0.94%, 1.91%, 1.13%, and 1.55% so far this year.  This compounds to only about a 5.6% total increase since you began tracking.  I would be astounded if you were not only able to keep track of spending in all categories down to the penny, but keep a full inventory of the quantity you purchase in each category as well.  You may have actually purchased 2% less lentils by weight than last year because you have become more efficient at utilizing them, or you may have substituted a slightly less expensive alternative a small percentage of the time.  I find it very hard to believe your grocery and cooking habits have literally not deviated in 5 years.  I'm not saying they need to change drastically, but I would bet I don't purchase the exact same quantity of each food item year in and year out.  The small amount of inflation Canada has experienced in the last few years would be completely lost in the noise and measurement error.

Also this:

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.

That is nearly 11% increase in 5 years, and is probably a significant portion of your budget.  You are absolutely experiencing inflation and just don't realize it.

EDIT: I just realized this post was almost a year old, so my information is shifted by a year.

I do actually track every category to the penny, though not the specific quantities of each item purchased. Our total yearly spending is definitely holding steady. It's just weird. Every year people tell me my costs are going to increase, and every year they stay the same.

Your spending habits were 100% optimized 6 years ago, and you've literally made no improvements in efficiency over those years? Impressive.

I was going to look up the price of lentils and dried beans to make a point, but it seems they've actually been decreasing in price over the last several years.   But that just raises additional questions, like why is your grocery bill holding steady while staples like beans and lentils are decreasing in unit price? Shouldn't your grocery bills actually be deflating?

[Zikoris]

Interestingly, we're now almost up to five years of data, so I can say definitively that our budgets have not experienced inflation for that time. It will be interesting to see how long that holds steady for, but so far so good.

You can definitely say whatever you want, I disagree that that's accurate though.

I'm assuming you've tracked 2012, 2013, 2014, 2015, and almost all of 2016 now?  2012 is your baseline, so inflation during that year is irrelevant.  The years since (for Canada) are 0.94%, 1.91%, 1.13%, and 1.55% so far this year.  This compounds to only about a 5.6% total increase since you began tracking.  I would be astounded if you were not only able to keep track of spending in all categories down to the penny, but keep a full inventory of the quantity you purchase in each category as well.  You may have actually purchased 2% less lentils by weight than last year because you have become more efficient at utilizing them, or you may have substituted a slightly less expensive alternative a small percentage of the time.  I find it very hard to believe your grocery and cooking habits have literally not deviated in 5 years.  I'm not saying they need to change drastically, but I would bet I don't purchase the exact same quantity of each food item year in and year out.  The small amount of inflation Canada has experienced in the last few years would be completely lost in the noise and measurement error.

Also this:

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.

That is nearly 11% increase in 5 years, and is probably a significant portion of your budget.  You are absolutely experiencing inflation and just don't realize it.

EDIT: I just realized this post was almost a year old, so my information is shifted by a year.

I do actually track every category to the penny, though not the specific quantities of each item purchased. Our total yearly spending is definitely holding steady. It's just weird. Every year people tell me my costs are going to increase, and every year they stay the same.

Your spending habits were 100% optimized 6 years ago, and you've literally made no improvements in efficiency over those years? Impressive.

I was going to look up the price of lentils and dried beans to make a point, but it seems they've actually been decreasing in price over the last several years.   But that just raises additional questions, like why is your grocery bill holding steady while staples like beans and lentils are decreasing in unit price? Shouldn't your grocery bills actually be deflating?

I would imagine there's been a certain amount of optimization, but really, there's not that much room for fat-cutting when you spend 9K/person in Vancouver unless you move under a bridge. I don't buy beans because they make me vomit (literally), and rarely buy lentils due to not being a huge fan of them.

[frugalnacho]

Interestingly, we're now almost up to five years of data, so I can say definitively that our budgets have not experienced inflation for that time. It will be interesting to see how long that holds steady for, but so far so good.

You can definitely say whatever you want, I disagree that that's accurate though.

I'm assuming you've tracked 2012, 2013, 2014, 2015, and almost all of 2016 now?  2012 is your baseline, so inflation during that year is irrelevant.  The years since (for Canada) are 0.94%, 1.91%, 1.13%, and 1.55% so far this year.  This compounds to only about a 5.6% total increase since you began tracking.  I would be astounded if you were not only able to keep track of spending in all categories down to the penny, but keep a full inventory of the quantity you purchase in each category as well.  You may have actually purchased 2% less lentils by weight than last year because you have become more efficient at utilizing them, or you may have substituted a slightly less expensive alternative a small percentage of the time.  I find it very hard to believe your grocery and cooking habits have literally not deviated in 5 years.  I'm not saying they need to change drastically, but I would bet I don't purchase the exact same quantity of each food item year in and year out.  The small amount of inflation Canada has experienced in the last few years would be completely lost in the noise and measurement error.

Also this:

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.

That is nearly 11% increase in 5 years, and is probably a significant portion of your budget.  You are absolutely experiencing inflation and just don't realize it.

EDIT: I just realized this post was almost a year old, so my information is shifted by a year.

I do actually track every category to the penny, though not the specific quantities of each item purchased. Our total yearly spending is definitely holding steady. It's just weird. Every year people tell me my costs are going to increase, and every year they stay the same.

Your spending habits were 100% optimized 6 years ago, and you've literally made no improvements in efficiency over those years? Impressive.

I was going to look up the price of lentils and dried beans to make a point, but it seems they've actually been decreasing in price over the last several years.   But that just raises additional questions, like why is your grocery bill holding steady while staples like beans and lentils are decreasing in unit price? Shouldn't your grocery bills actually be deflating?

I would imagine there's been a certain amount of optimization, but really, there's not that much room for fat-cutting when you spend 9K/person in Vancouver unless you move under a bridge. I don't buy beans because they make me vomit (literally), and rarely buy lentils due to not being a huge fan of them.

Optimizing =|= fat cutting.  I don't believe you, or anyone, doesn't throw away some amount of food.  Cutting down the amount of food that gets thrown out and utilizing closer to 100% of what you purchase is optimizing.  Swapping out steak for chicken is cutting the fat (literally and figuratively). 

Even a small amount of optimization would render your entire data set useless.  Even if you didn't optimize during that time period, I still have my doubts about how useful the precision of your tracking has when you aren't measuring the quantities of food you buy.  Spending $200 on chicken each year is a useless metric unless you know exactly how much chicken that purchased.  I don't think it's a valid assumption to assume you ate the exact same number of calories each year, and in the same proportion.  If you ever get invited to dinner over someone else's house and don't bring your own groceries then your data will be skewed also, or if you invite anyone over.  Not by much, but we are only quibbling over like 4-5% over a 5 year period, so it doesn't take much.

[kendallf]

Yes, I'm still subject to inflation. I'm not disagreeing with that point of fact. I'm just saying that if we asked the question: "If I'm not a normal consumer, what inflation rate is applicable to me?" The relevant data IS available, and the "direction in which [my inflation rate] differs" from the norm IS knowable. I'm just too lazy to search through the sheaves of spreadsheets to compile the data. It'd be nice if someone in the gov't put together a nice interface for finding the inflation rate of an individualized market basket of goods *wishful thinking*.

ETA: Found this website, and decided to browse a few of the tables. You had mentioned used cars vs new cars; going back as far as I could, the (annualized) inflation rate for used is 10.6%, while new is 17.5%. I'd be subject to the lower rate, buying used. Then, just for fun, I looked at food. Restaurant inflation: 11.3%, food staples (rice/potatoes/etc., what they had listed in that front page table): under 4%. Unfortunately, the tables don't all go back 100 years, so I could only go back as far as they had data.

I think this is the only relevant point to be made, and I'm too lazy to go looking for the data.  If you assume that unprocessed staple foods, for instance, average lower inflation percentages than processed foods (maybe a good assumption?), then a person who eschews processed foods will experience a lower inflation rate.

Broadening this to a lifestyle, if someone were to do the work of looking in all of those sub-baskets of goods and identifying trends, you might (or might not) be able to argue that a Mustachian experiences lower inflation than the average. 

[Zikoris]

We're actually pretty close to zero food waste - With a $110/person/month food budget (which hasn't changed since we started tracking) we pretty much have to be, or we'd be wasting away very quickly.

Regardless, I'm not denying the existence or concept of inflation - I've just noticed that I have yet to experience it in tangible form (i.e. seeing my costs increase) in the time I've been tracking. I'm certainly curious how long that can continue, because at this point there's really not a lot more optimizing we can do short of finding some sort of free housing.

[Prairie Stash]

Substitution doesn't mean you don't experience inflation, it just means you react and adjust.  It's like saying I normally spend $100k/yr, then 5% inflation happens so I reduce my spending by 5% and claim I don't experience inflation (whether I just stop going to the bar, or I substitute pork for beef, or I get my car washed slightly less often, etc).  I would absolutely experience inflation in that situation, even if I was able to maintain my $100k/yr budget. 

I also don't see how anyone thinks they are going to be consistently below inflation long term.  How is that possible or sustainable? Inflation erodes the value of the dollar and increases the cost of everything, even if some things are delayed behind other things. If the things you purchase don't experience inflation (or experience less than average inflation for very long periods) the logical conclusion is they would end up being free or virtually free, while other things would experience run away inflation.  I suspect supply and demand would self correct those situations and revert them to the mean.

The CPI inflation rate says you don't adjust, you buy the same basket of goods. Your hypothetical $100K/yr budget would, by CPI, go to $105,000. I get what you're saying but you're proving the point of substitution, staying at $100K is the definition of substitution but seeing inflation, based on CPI, states you MUST go to $105K, otherwise you didn't follow CPI methods of measurement.

CPI has three known problems, the fixed basket is the main one, since it doesn't allow for substitution (you aren't allowed to react and adjust, its against the setup of the CPI). The other 2 problems are the introduction of new items and quality of goods. This isn't my opinion, its common knowledge.

[Gin1984]

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.

Agreed.  We found out that the grant that supports my husband runs out in Dec.  We went through the budget and cut, the things we could cut so far are less than 2% of my budget. 

[frugalnacho]

Substitution doesn't mean you don't experience inflation, it just means you react and adjust.  It's like saying I normally spend $100k/yr, then 5% inflation happens so I reduce my spending by 5% and claim I don't experience inflation (whether I just stop going to the bar, or I substitute pork for beef, or I get my car washed slightly less often, etc).  I would absolutely experience inflation in that situation, even if I was able to maintain my $100k/yr budget. 

I also don't see how anyone thinks they are going to be consistently below inflation long term.  How is that possible or sustainable? Inflation erodes the value of the dollar and increases the cost of everything, even if some things are delayed behind other things. If the things you purchase don't experience inflation (or experience less than average inflation for very long periods) the logical conclusion is they would end up being free or virtually free, while other things would experience run away inflation.  I suspect supply and demand would self correct those situations and revert them to the mean.

The CPI inflation rate says you don't adjust, you buy the same basket of goods. Your hypothetical $100K/yr budget would, by CPI, go to $105,000. I get what you're saying but you're proving the point of substitution, staying at $100K is the definition of substitution but seeing inflation, based on CPI, states you MUST go to $105K, otherwise you didn't follow CPI methods of measurement.

CPI has three known problems, the fixed basket is the main one, since it doesn't allow for substitution (you aren't allowed to react and adjust, its against the setup of the CPI). The other 2 problems are the introduction of new items and quality of goods. This isn't my opinion, its common knowledge.

I'm not saying you can't substitute, I just think it's a bit misleading to state you don't experience inflation when you are in fact adjusting your behaviors and making substitutions to stay within a certain budget.  The whole reason you are modifying behavior and making substitutions is because the price of items you want to purchase are inflating beyond your budget.

[frugalnacho]

Would you say someone who had a $40k/yr budget in 1990, and has maintained the same overall budget since then has experienced inflation?  His expenses are still $40k every year, he just keeps adjusting and substituting what he buys to stay within his budget.

[Prairie Stash]

Substitution doesn't mean you don't experience inflation, it just means you react and adjust.  It's like saying I normally spend $100k/yr, then 5% inflation happens so I reduce my spending by 5% and claim I don't experience inflation (whether I just stop going to the bar, or I substitute pork for beef, or I get my car washed slightly less often, etc).  I would absolutely experience inflation in that situation, even if I was able to maintain my $100k/yr budget. 

I also don't see how anyone thinks they are going to be consistently below inflation long term.  How is that possible or sustainable? Inflation erodes the value of the dollar and increases the cost of everything, even if some things are delayed behind other things. If the things you purchase don't experience inflation (or experience less than average inflation for very long periods) the logical conclusion is they would end up being free or virtually free, while other things would experience run away inflation.  I suspect supply and demand would self correct those situations and revert them to the mean.

The CPI inflation rate says you don't adjust, you buy the same basket of goods. Your hypothetical $100K/yr budget would, by CPI, go to $105,000. I get what you're saying but you're proving the point of substitution, staying at $100K is the definition of substitution but seeing inflation, based on CPI, states you MUST go to $105K, otherwise you didn't follow CPI methods of measurement.

CPI has three known problems, the fixed basket is the main one, since it doesn't allow for substitution (you aren't allowed to react and adjust, its against the setup of the CPI). The other 2 problems are the introduction of new items and quality of goods. This isn't my opinion, its common knowledge.

I'm not saying you can't substitute, I just think it's a bit misleading to state you don't experience inflation when you are in fact adjusting your behaviors and making substitutions to stay within a certain budget.  The whole reason you are modifying behavior and making substitutions is because the price of items you want to purchase are inflating beyond your budget.

I experience inflation, I agree and I've said it before. I disagree that I experience inflation at a rate equal to the CPI, I've said that I have lower than average inflation on my budget. One of the assumptions made for retiring is that returns will exceed inflation at 4%, the 4% SWR. If I experience inflation at a rate higher or lower than the CPI my assumption of a 4% return above inflation may be compromised, if I'm on the low side I could have retired earlier (or count it as another layer of safety margin) or if I'm higher than I'm pretty much in trouble in 30 years. On average though the average person is fine, its only bad if you're an outlier or some weird group like MMM.

Basically we're quibbling over a 0.2-0.5%/year difference in inflation, over my lifetime that will add up but its marginal over the next decade. Its well known some groups experience higher rates and lower rates, inflation is not a constant for everyone. One of the most popular above average inflation groups is students, every time someone says the cost of a bachelors is increasing what they're really saying is the inflation rate for students exceeds the inflation rate for society as a whole. If you think student costs have gone up at CPI rates, that's fine, you can make your case that a degree from 1975 costs the same as a degree from 2015 (adjusted for inflation). Not every person gets a degree, ergo not everyone has experienced the above average inflation students feel.

http://cdn.static-economist.com/sites/default/files/imagecache/original-size/20131012_BRC526.png

http://www.economist.com/news/britain/21587837-some-suffer-much-more-others-inflation-pinched

[Villanelle]

Would you say someone who had a $40k/yr budget in 1990, and has maintained the same overall budget since then has experienced inflation?  His expenses are still $40k every year, he just keeps adjusting and substituting what he buys to stay within his budget.

If I used to spend $10,000 a year on clothes (hypotehtical only!) and now I buy less and only spend $200, have I experienced deflation?  No, I've changed my spending habits.  Or, if I buy 10% less but prices have gone up 10%, so I'm still spending $10,00o, then yes, I'd say I very much did still experience inflation.  And then I adjusted to that inflation by purchasing less (or differently). 

So I'd very much say that someone who has the same $40k budget for 25 years has experienced inflation.  He's just adjusted his purchasing accordingly. 

Which brings us back to the issue of mustachianism and how inflation may affect us as compared to our spendypants counterparts.  And I still maintain that the less you spend (or really, the more optimized you are), the less able you are going to be to adjust.  If you pay for oil changes and the price goes up due to in increase in the cost of the oil and the filter, you can adjust by going DIY.  If you are already DIY, then what are you going to do when that oil and filter costs more?  You may be able to switch to a different brand and save $1, but if you are already hyper-optimized, you've already done that.  And even if you haven't, it isn't going to see the same return as going from Quick-E-Lube to DIY, which might save $10.  One could switch from pre cut apple slices to buying apples, but if they've already done that, the savings from apples to in season fruit is going to be less.

That said, I don't really see this as an actionable item.  The more optimized you are, the less room you have to use optimization in order to deal with inflation. But so what?  I suppose it would mean that if someone really feared hyper inflation, they'd want to have a larger stache, but beyond that.

So it's two questions--the first being whether items generally purchased by mustachians are more or less subject to inflation. I don't think that's answerable.  The second is whether mustachians are more or less able to adapt if and when inflation rises.  I'd argue that we are more used to and willing to adapt and change, which works in our favor, but that we've already plucked the low hanging fruit of cost-cutting, so we have less ability to cut and shift costs.

[mathjak107]

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.

the big wild card is what you will be doing for health care . depending on income level inflation in healthcare costs and insurance has been off the hook . not everyone will pile on to medicaid or be able to get an aca subsidy .

more typically older retirees are effected less by inflation . as we age  those of us with discretionary spending tend to spend less from mid-70's to mid 80's .

the things we no longer buy or do help pay the increases on things that went up .

but for many here it will be an individual issue . many here do not have much to cut back on when retiring so young so the effect of inflation will really be both age based and discretionary spending  based .

obviously if there is no where to cut back from as you reach older ages you will be effected more by inflation . renters will also feel inflation a bit more then owners  with either paid off homes or fixed mortgages .


realize too depending on location a paid off home can mean little down the road as far as inflation and affordability .

when we all bought long island homes in the 1970's they were 30-35k. that was a lot of money in those days , our rent was only 189 bucks a month . so a mortgage was crushing .

so fast forward to today . those homes are paid off and that 30k mortgage is gone but taxes are 15k . so in the scheme of things the fact a mortgage of a few hundred bucks is gone barely represents a utility bill today  so inflation certainly took its toll and many long islanders are retiring elsewhere  because even having that paid off home has not helped affordability .

[Panly]

If a mustachian  relies on a prefunded stache for future income - which is the case -  in a high inflation world, that advance funding simply evaporates.

As beautifully explained by Warren Buffet 41 years ago : http://www.cookandbynum.com/wp-content/uploads/2013/08/Warren-Buffett-to-Katharine-Graham.pdf


In other words, i think everybody in this thread focusses on minor details and ignores the elephant in the room.

[Bertram]

I just found out how I can become independent of gas price increases in the future thanks to this thread!

I will simply buy gas for 50 USD everytime and make do with however much gas I get. Thanks everyone!

[SwordGuy]

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.

And totally subject to the whims of Congress (or whatever governmental entity in your country decides that).

That COL could disappear.  Or, more likely, have its formula changed so it works much less well.

[Metric Mouse]

I just found out how I can become independent of gas price increases in the future thanks to this thread!

I will simply buy gas for 50 USD everytime and make do with however much gas I get. Thanks everyone!

Mustache Math!

[Zikoris]

I just found out how I can become independent of gas price increases in the future thanks to this thread!

I will simply buy gas for 50 USD everytime and make do with however much gas I get. Thanks everyone!

You could stop driving entirely! Then you'd become independent or both gas price increases and car price increases.

[Classical_Liberal]

Sorry, this post got long, bear with me.

I would agree with the both of these points made in this thread:

• Mustachians are less subject to inflation because of our inherent ability to maximize substitution bias.  This is what we do, optimize spending.   
• Mustachians are more subject to inflation because we already operate on a lower, more efficient budget which provides less options for substitutions

How can one agree with both?  To the first point, when macro economic situations change we will be significantly more likely to adapt our spending habits and change with the times than the average consumer which the CPI is meant to track.  Example, climate change causes double digit inflationary pressure on produce, we grow a garden because the ROI becomes greater.  We will better and more quickly modify lifestyles to new inflationary pressures.

To the second, we will have less ability to fend off old, insidious, but continuous inflationary pressures.  Example, the price of gasoline (although volatile) continuously increases slowly over time.  Since this is historical and continual, mustachians have already significantly minimized driving and have little remaining ability to substitute. 

I have not seen any significant discussion on other major advantages that mustachians have in a fight against inflation such as; capital, time, and self sufficiency. Time and self sufficiency provides mustachians with a greater than average ability to combat service related inflationary pressures.  If plumbers suddenly double their rates, we would learn to DIY and have the time to do so.  If rents in our prefered living area start inflating, we have the capital to purchase real estate and minimize future inflationary pressure on our housing costs. 

All of this lends me to personally believe that Mustachians will likely experience inflation LESS than the CPI.   Recency bias has us underestimating the effects of inflation over the long haul, it just been so low.  I disagree with previous comments that this has little impact over a decade.  It depends on the decade!  If a mustachian only managed to reduce inflation's impact by 25 percent in the 70's then the 4% rule looks a lot better in those notoriously bad start years!

To clarify my position further.  I realize that Joe & Jane consumer continue to have income, which is theoretically inflation adjusted.  This is, of course, is the best inflation hedge of all.  As a result, a retired mustachian without wage income will always be MORE at risk of inflationary pressures.  My point is that when we are running our retirement scenarios on Cfiresim or the like and elect to take CPI adjusted increases we are already factoring in this risk.  If mustachian inflation is even slightly less than the average consumer with wage income protection, then over the period of a long retirement we are signifcantly overestimating our spending needs. We fight tooth and nail to reduce our ER on an index fund by 0.1%, but fail to take into account the huge impact taking only 75% of CPI withdrawal increases would have.

[bacchi]

I just found out how I can become independent of gas price increases in the future thanks to this thread!

I will simply buy gas for 50 USD everytime and make do with however much gas I get. Thanks everyone!

You could stop driving entirely! Then you'd become independent or both gas price increases and car price increases.

You might be less dependent but definitely not independent. Gas (really, crude oil) runs the world's markets.

[arebelspy]

I have not seen any significant discussion on other major advantages that mustachians have in a fight against inflation such as; capital, time, and self sufficiency. Time and self sufficiency provides mustachians with a greater than average ability to combat service related inflationary pressures.  If plumbers suddenly double their rates, we would learn to DIY and have the time to do so.  If rents in our prefered living area start inflating, we have the capital to purchase real estate and minimize future inflationary pressure on our housing costs. 

Okay, but then you're just working for free.

In other words, time and capital don't make you less susceptible to inflation, but better able to deal with it.

Getting a job is another way to deal with it, with all that extra time you have.

But if a Mustachian goes "I have all this free time, and my money isn't stretching as far as it was" and goes and get a job, and uses that time to earn money and pays more for things, I wouldn't say they were less susceptible to inflation.  And if they say "I have all this free time, and my money isn't stretching as far as it was" and they start a serious garden, I wouldn't say they were less susceptible to inflation.

Maybe they enjoy doing it, and that's great, but just because they have the time to DIY, and will do so for free, since they're apparently valuing their time at $0, that helps them deal with it, the same way going to get a job would.  But they're still having to deal with it, meaning they're still as subject to experiencing inflation (see: thread title).

[arebelspy]

If a mustachian  relies on a prefunded stache for future income - which is the case -  in a high inflation world, that advance funding simply evaporates.

Why can't the investments keep up with inflation?

[Classical_Liberal]

Okay, but then you're just working for free.

In other words, time and capital don't make you less susceptible to inflation, but better able to deal with it.

Getting a job is another way to deal with it, with all that extra time you have.

But if a Mustachian goes "I have all this free time, and my money isn't stretching as far as it was" and goes and get a job, and uses that time to earn money and pays more for things, I wouldn't say they were less susceptible to inflation.  And if they say "I have all this free time, and my money isn't stretching as far as it was" and they start a serious garden, I wouldn't say they were less susceptible to inflation.

Maybe they enjoy doing it, and that's great, but just because they have the time to DIY, and will do so for free, since they're apparently valuing their time at $0, that helps them deal with it, the same way going to get a job would.  But they're still having to deal with it, meaning they're still as subject to experiencing inflation (see: thread title).

I understand what you're saying.  However, it is less inflation through substitution.  Seed, water and dirt are products that are being substituted for supermarket produce.   Under the "get a job logic", you can make the same argument for anything...  For example, a 6%WR has a 100 percent success rate because if it is failing you just get a job and earn money.  The whole idea of a mustachian retirement is to not work for money. Live a different, more sustainable, lower consuming lifestyle instead. 

I think the two points I'm trying to, perhaps unsuccessfully, make are: 

Someone without a job (ie more free time) and more available capital, has the ability to better adapt and substitute than the average consumer who has little capital and little free time. The CPI, by definition "is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care." As a result of our good fortune, mustachians can, on average, beat the CPI by some percentage and limit our personal inflation rate. If a person chooses to use neither his time nor capital to that end, fine, its his/her life.  IMHO that would be antithetical to the general definition of a "mustachian retiree".  Time and capital always have value, it's just a matter of how that value is used.

Secondly, I agree that inflation is absolutely a huge threat to portfolio failure.  However, if when backtesting retirement portfolio strategies a person chooses to adjust withdrawals for CPI (which I think most would), we are already taking the inflation risk into account.  If point one is true to any extent, then we may be significantly overestimating our future spending needs, even if CPI inflation can be beat by a meager 10-25 percent.

[frugalnacho]

Aren't we really just arguing over semantics?

My grocery bill was $500/mo last year.  Prices went up, but I substituted, so my grocery budget stayed $500 this year; therefore I wasn't subject to inflation.

vs.

My grocery bill was $500/mo last year.  Prices went up, but I substituted, so my grocery budget stayed $500 this year; therefore I experienced inflation by losing a small quality of life and/or happiness which I've assigned a monetary value - I've compromised my happiness by $x in reaction to inflation.

[arebelspy]

Aren't we really just arguing over semantics?

My grocery bill was $500/mo last year.  Prices went up, but I substituted, so my grocery budget stayed $500 this year; therefore I wasn't subject to inflation.

vs.

My grocery bill was $500/mo last year.  Prices went up, but I substituted, so my grocery budget stayed $500 this year; therefore I experienced inflation by losing a small quality of life and/or happiness which I've assigned a monetary value - I've compromised my happiness by $x in reaction to inflation.

It's semantics for that one year, but when you apply that over decades, it makes a BIG difference.

It's like saying "My financial advisor only charges me 1% versus your 0.15% expense ratio, that 0.85% difference is such a tiny number, are we going to argue over it?"--okay, it's small, but compounded over time it makes a big difference.

[Villanelle]

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.

And totally subject to the whims of Congress (or whatever governmental entity in your country decides that).

That COL could disappear.  Or, more likely, have its formula changed so it works much less well.

Sure.  And Congress could start taxing Roth withdraws or any number of things.   It wouldn't surprise me if there is slight tinkering with military retirement for those who already have it or are close.  But drastic overhaul?  It seems extremely unlikely to me.  There's a reason the major changes to the retirement system essentially grandfathered in those already serving.  So while I recognize there's a not-insignificant risk of small changes, the risk of drastic changes seems minuscule to me. 

[Telecaster]

Would you say someone who had a $40k/yr budget in 1990, and has maintained the same overall budget since then has experienced inflation?  His expenses are still $40k every year, he just keeps adjusting and substituting what he buys to stay within his budget.

Absolutely.  The constant adjusting and substituting is done because of inflation.  The budget is the same dollar amount but the things bought within that budget become much different over time. 

[Classical_Liberal]

Aren't we really just arguing over semantics?

My grocery bill was $500/mo last year.  Prices went up, but I substituted, so my grocery budget stayed $500 this year; therefore I wasn't subject to inflation.

vs.

My grocery bill was $500/mo last year.  Prices went up, but I substituted, so my grocery budget stayed $500 this year; therefore I experienced inflation by losing a small quality of life and/or happiness which I've assigned a monetary value - I've compromised my happiness by $x in reaction to inflation.

Surely the definition of happiness & quality of life is more subjective than a quantitative amount of money.  I basically agree with you, but some substitution may actually improve happiness & quality of life. Obviously there is a limit, but it is reasonable to assume that limit is below CPI for more flexible humans with extra time and capital?  I think yes, enough to make a very small difference each year, but a pretty big difference over longer periods.

[frugalnacho]

Aren't we really just arguing over semantics?

My grocery bill was $500/mo last year.  Prices went up, but I substituted, so my grocery budget stayed $500 this year; therefore I wasn't subject to inflation.

vs.

My grocery bill was $500/mo last year.  Prices went up, but I substituted, so my grocery budget stayed $500 this year; therefore I experienced inflation by losing a small quality of life and/or happiness which I've assigned a monetary value - I've compromised my happiness by $x in reaction to inflation.

It's semantics for that one year, but when you apply that over decades, it makes a BIG difference.

It's like saying "My financial advisor only charges me 1% versus your 0.15% expense ratio, that 0.85% difference is such a tiny number, are we going to argue over it?"--okay, it's small, but compounded over time it makes a big difference.

I think we are in agreement.  My point was more that one side seems to be looking only at the dollar value on the budget sheet and ignoring everything that's not an actual dollar vlaue, while the other side (me and you) are assigning a $ value to certain substitutions.  If I really want to eat beef, but I swap out chicken instead to maintain my budget, then inflation has affected me.  Even though my budget is the same, I've been affected by the swap.

Aren't we really just arguing over semantics?

My grocery bill was $500/mo last year.  Prices went up, but I substituted, so my grocery budget stayed $500 this year; therefore I wasn't subject to inflation.

vs.

My grocery bill was $500/mo last year.  Prices went up, but I substituted, so my grocery budget stayed $500 this year; therefore I experienced inflation by losing a small quality of life and/or happiness which I've assigned a monetary value - I've compromised my happiness by $x in reaction to inflation.

Surely the definition of happiness & quality of life is more subjective than a quantitative amount of money.  I basically agree with you, but some substitution may actually improve happiness & quality of life. Obviously there is a limit, but it is reasonable to assume that limit is below CPI for more flexible humans with extra time and capital?  I think yes, enough to make a very small difference each year, but a pretty big difference over longer periods.

But you are necessarily equating some dollar value to the decision by the very act of making the decision. If your grocery budget is $500/mo, and the price of beef raises that to $530/mo, and you consciously decide to substitute chicken for beef in order to keep it at $500/mo you have necessarily compromised what you actually want for financial gain.  If eating beef over chicken doesn't bring you more happiness, then why would you have chosen it in the first place? 

[Panly]

If a mustachian  relies on a prefunded stache for future income - which is the case -  in a high inflation world, that advance funding simply evaporates.

Why can't the investments keep up with inflation?

http://fortune.com/2011/06/12/buffett-how-inflation-swindles-the-equity-investor-fortune-classics-1977/