Inflation: The Phantom Menace

In the past I would occasionally review a Will somebody wrote in the 1950’s or 1960’s. It might include something like a stipend for a favorite nephew of $100 per month for life. A hundred dollars a month!? That’s not even carfare! This little story is not meant to illustrate Aunt Gotbucks’s cheapness; $100 per month was a pretty decent gift when she wrote the Will in 1955. Rather the story illustrates the long-term ravages of inflation.

Whether you’re in your working years or your retirement years, your retirement planning is inevitably long-term planning, and that means you have to take inflation into account. A number of commenters (all named Anonymous) have astutely pointed this out.

What is inflation, anyway? Like pornography, we all know it when we see it, but it’s notoriously difficult to define and measure. Generally, inflation is the rise in price for the same amount of stuff. One thing that makes it difficult to measure is that it’s different for everybody, depending on the sort of stuff you buy. Do you need education, rent, a new TV or health care? They have inflated at different rates. And stuff changes. How do you compare the cost of a slide rule to the cost of an HP12C calculator? A broccoli to a Big Mac? And it’s different if you live on a farm or in the city, the Northeast or the Midwest.

Nonetheless, the U.S. Department of Labor maintains an index which attempts to measure inflation (actually, multiple indexes). You can find them here (http://data.bls.gov/cpi/). Of course no index measures your personal rate of inflation, but it measures something.

Inflation is silent and it's sneaky. It’s out there, eroding the value of your assets. It’s happening. But the guy on the nightly news isn’t screaming about today’s increase in the CPI, the way he’s in your face about today’s drop in the Dow.

It’s slow, building over time. Changes in stock values can be large and swift (these days sickeningly so). Inflation is slower. 2% one year; 4% another. But its cumulative impact over the course of your life will be large.

And it’s inevitable. There have only been 12 years during the 95-year period between 1913 and 2008 when the cost of living declined—only two since the beginning of World War II—and the most recent year that occurred was over 50 years ago, in 1955. (There were a few months in 2008 when the CPI dropped, but it increased slightly over the calendar year.)

I know what you’re thinking. Everybody is now worrying about deflation, not inflation. Yes they are. And the puppet-masters at the Fed and elsewhere in Washington will be doing everything in their considerable power to turn deflation back into inflation. That $2 trillion we’re currently adding to the national intergenerational debt will certainly support the effort. So from a planning perspective, you’d better count on inflation.

Individually, we can’t do anything to affect inflation. But as we plan our financial futures, we certainly should take it into account. I assure you I have done so in the examples I’ve spun in this column so far, and I will continue to do so in the future.

So how do you take inflation into account? That’s a subject for a couple of future posts. Right now I’ve got to go cash my monthly $100 check and buy myself a nice new tie.