Sensible Expectations for Inflation

retirement_roadMy Comments: When I talk with prospective clients and those already clients, I talk about existential risk. These are risks that may or may not happen, depending on any number of variables. One of them is inflation since it reduces the purchasing power of your dollars over time.

Another existential risk is the financial burden imposed on a family whenever someone needs long term care. The odds are high it will happen for 60% to 75% of us. However, if you simply die before the need for long term care happens, then the risk disappears.

Inflation risk is far less existential, if you expect to live a long and happy life, chances are good it will be there, with the only question being how much inflation. Having solutions in place that mitigate the risk makes sense.

Managing expectations is also an important part of financial planning. Growing your money over time at a rate that exceeds the rate of inflation goes a long way to helping you maintain your standard of living going forward.

posted by Jeffrey Dow Jones July 24,2014 in Cognitive Concord

One of the things I’ve been watching closely over the last few months is inflation. Not for the reasons you might be thinking — I’m not one of these inflation truthers banging that tired old drum that inflation is higher than being reported. I don’t think there’s a big conspiracy out there about the CPI. All things considered, and as complicated as it is to calculate, it’s actually a really good data point.

One of the early themes of this newsletter, way back in 2009, was that inflation wasn’t something to worry about. Longtime readers may remember The Inflation Chupacabra with fondness. The basic premise was: I’ll believe it when somebody brings me solid evidence. Five years later, I’m still waiting.

It’s possible – possible — that may be changing.

What I’m really watching right now is wage inflation. Because without a significant and sustained pickup in wages, you can’t get a significant and sustained pickup in prices. The one supports the other. For some reason, there’s this myth out there in certain circles where, in this decade of stagnant income, systemic inflation can run at 5 or 10% per year. It can’t. Some goods can increase in price at a dramatic rate. But not systemic prices, not unless the wages supporting those prices also rise.

Wage inflation is unquestionably picking up a little bit, but it’s not significant enough to set the sirens blaring. We still have a long way to go before reaching levels of concern. I posted this chart from Deutsche Bank’s Torsten Slok a few weeks ago:
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