It’s easy to think of inflation as financial weather – something we must endure and can’t control. While it’s true we can’t individually control the prices that grocers, automakers and landlords charge, we can, and should, control what we spend.
We’re all familiar with the Consumer Price Index, or CPI. It tracks the cost of groceries, rent, utilities and other goods and services most of us use. When the cost of men’s sweaters go up, so does the index. CPI has been rising only very slowly recently, barely 2 percent a year.
But does the CPI reflect how you live and consume? Probably not. Like all statistical averages, it captures what’s typical for the masses, not what’s specific to you.
What really matters to you is the MyPI, the My Price Index.
What you need vs what you want
Where do you fall on this chart? Are you spending in categories where prices are rising quickly, or is more of your money going to items with stable or falling prices? Is your vice a new car or TV every year? Do you tend to spend more on housing and renovations? Or does your kid’s education take the top seat on your annual expenses? Maybe you indulge in all categories because your income can support it. Many of the categories above have less expensive choices if you are willing to search for maximum value among alternatives. If you can squeeze out savings through thoughtful spending then you have more to invest and compound.
How high is high?
Bloomberg says that this week’s CPI number was at a six-year high of 2.8%. It also said the Fed’s separate, preferred inflation indicator is at 2%. Both numbers are only modestly higher from five years ago so the headlines are not really significant. But if inflation went to 4% quickly, that would be something noticeable. Four percent is what the bond market is worried about.
Your future, your choices
How will your spending change over time? Will your own cost of living hold fairly steady, or rise over the next 10, 20 or 30 years? Changing prices are part of the equation, but so are your own choices and behavior. Will slow and steady upgrades in your buying patterns raise your MyPI? Some refer to this as “lifestyle creep.”
Why do we care?
Your personal inflation rate over the next generation or so will have two big influences on your financial outcomes.
First, the higher your MyPI, the less your money can buy when you cash out of stocks and bonds. Put another way, MyPI is what your money needs to earn just to keep up with your spending habits. If your spending rises five percent each year, you need to earn five percent a year on investments just to hold your place in line.
Second, the inflation rate is the cost of holding cash. As we have discussed previously, anyone holding cash – often justifying doing so for its “safety” – loses purchasing power through the relentless erosion of inflation (see our calculator). We typically do not recommend holding cash for that exact reason (except in a short-term emergency fund). The higher your MyPI, the faster any cash holdings decline in value.
Take it personally
While low CPI growth has been a comfort over the last few years, we know higher inflation will return someday. Perhaps more importantly, we know that MyPI can surge at any time, thanks to our choices, priorities and tastes.
This communication may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.”
“Historical performance is not indicative of future results. The investment return will fluctuate with market conditions.
Past performance is not indicative of any specific investment or future results. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor.
Investment strategies, philosophies, allocations and holdings are subject to change without prior notice.
This communication is intended to provide general information only and should not be construed as an offer of specifically tailored individualized advice.
While the Adviser believes the outside data sources cited to be credible, it has not independently verified the correctness of any of their inputs or calculations and, therefore, does not warranty the accuracy of any third-party sources or information.
Adviser does not endorse the statements, services or performance of any third-party vendor.
Unless stated otherwise, any mention of specific securities or investments is for hypothetical and illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable.
Any IPO alerts are purely informational and should not be construed as recommendations to invest.
Adviser is not licensed to provide and does not provide legal, tax or accounting advice to clients. Advice of qualified counsel or accountant should be sought to address any specific situation requiring assistance from such licensed individuals.
Any case studies or hypothetical client profiles are for demonstration purposes only. They illustrate the breadth and depth of the many clients we represent at various life stages. Any similarities to actual Adviser’s clients past or present are strictly coincidental. Individual advice and results will vary based on each client’s circumstances, objectives and prevailing economic conditions.