Common Cents #3 Inflation

Inflation Any talk about saving and investing for retirement or any other reason must start with an understanding of inflation. Inflation is the tendency for things to cost more in the future, or more specifically, for money to be worth less. Inflation is not a bad thing unless it is out of control. In fact, it is an important driver of the economy. A good example is real estate. We buy a house to lock in our housing cost because the house payment will be the same every month for years to come. Rent, on the other, is constantly being adjusted upward for inflation. Without inflation, or worse the opposite, deflation, we would not be buying houses because we would be expecting rent prices to go down. Furthermore, we expect our house to be worth more when we get ready to sell down the road because of inflation. This principle applies to everything we buy to some degree. Without inflation, the economy would slow dramatically.   I think it is important to consider the impact of inflation in all of our spending. There is a nifty calculator online that gives a lot of insight and understanding. It is usinflationcalculator.com The idea is to put in two dates and a dollar amount, and the calculator gives the price in the new date dollars. For example, I bought a new Ford pickup in 1971. I remember clearly the cost was $4100. I told the dealer I wanted a truck with the biggest engine available and no other options. I got a barebones hot rod work truck. By plugging in $4100 and 1971 into the inflation calculator, I got $26,130 in 2020 dollars. That is about the same price as a stripped-down F-150 today, if there is such a thing, because new pickups are better and more luxurious in every way than they were 50 years ago. Another example, I bought a bass guitar in 1969 for $425. In today’s money, that is $2989. Vintage Guitar Price Guide states its current value at $2850. That tells me that it hasn’t cost me anything to own it, and it has brought a lot of joy over the years. That makes it a “Good Buy.” Our personal inflation rate may be somewhat different than the amount stated by the government. For example, my spending habits are probably not the same as everybody else’s. If I drive 50,000 miles a year, the price of gasoline will affect me a whole lot more than the person who only drives 5,000 miles a year. My 1971 Ford got 12 mpg. If a new 2020 Ford gets 24 mpg, the costs per mile have been cut in half, especially considering that the cost of gas, adjusted for inflation, is less now than then. If I were a vegetarian, the price of beef would not affect me, but the price of broccoli might. When making investments or deciding where to store our money, inflation must always be considered. Money in a checking account or even most bank savings accounts is losing value in terms of purchasing power. We must subtract the inflation rate from the earnings to figure our actual return on investments. We can only guess what inflation will be like over the next 20 or 30 years, but if we are making retirement plans, locking down costs and making our money as inflation proof as possible is the best idea. The impact of the Covid-19 Pandemic on the inflation rate will be important to consider, but that will be just one factor to watch as we make decisions on what to purchase, what to save and invest, and how our resources are best used over time.

Jim Mathis