inflation what's it about

[LivingAlmostLarge]

So surprisingly I'm young (is that right?) enough that I haven't seen inflation ever in my lifetime (40s) that I can remember. By the time i was old enough to realize $ it was the 90s and I feel like inflation was not a problem. Anyway do you think this inflation is transient (if so for how long) or is it here a longer period of time? What do you think is a reasonable inflation?

Also previously did incomes go up in lock step with inflation? Or is wage growth what stopped inflation? What happened? I know my aunts and uncles had mortgages in the 1980s at rates of 12/13%. What would happen if that happened again? Would we even get there? How would we get there? What will happen to both the big picture economy and the individual economy?

What do you guys think will happen? I can easily tell that everything is so much more expensive or it's substantially smaller portions. Both eating out and groceries. Have you seen the breakfast sandwiches at starbucks? We hadn't had it in months maybe since the summer, and over the break we had it and I was like that's tiny!

[disneysteve]

Well you have seen inflation. It happens all the time. It's just usually more gradual. Prices in 2020 before COVID hit weren't the same as they were 5 or 10 years earlier. the difference recently is that the rate of inflation spiked up because of the impacts of the pandemic. We went from 2-3% inflation to 6-7% inflation in a very short time, and many prices have gone up 10-20% practically overnight. And product size shrinkage has been a "hidden" form of inflation for years. Orange juice cartons used to be 64 oz. Now they're 59 oz I think. Ice cream used to come in a half gallon tub. Now it's quite a bit less. A lot of canned goods used to be 16 oz. Now they're 15 or 14 oz. It's a way that manufacturers can keep the price stable by giving you less product. I've always hated that. I'd rather pay more.

No, wages don't move in step with inflation. That's the problem. If wages went up as much as prices went up, there would be no issue. But prices go up a lot faster than wages rise so you lose more and more buying power.

Our first mortgage was 8 or 9%, I don't recall the exact figure. It was fine. We bought a house that we could comfortably afford based on that.

Is the current higher inflation rate transitory? Yes. It won't stay at 7% forever. Once COVID finally settles down and supply chain disruptions ease up and the labor market gets back in shape, we'll get back to more typical inflation of 2-3%, but I have no idea when that will be.

[kork13]

First and foremost to point out is the difference between inflation (a percentage rate of price growth over time) and products' absolute prices (the dollar amount that is actually paid). The rate of inflation is almost certain to drop (or more slowly drift) back down toward a more normal 2-3%. But as for prices... Those may (likely) never go back down to what we're used to. Commodity prices might drift down, but most goods have the inflated prices, which will be here to stay.

[james.hendrickson]

What makes the board think that inflation will go back to historic levels?

It could just as easily remain at current levels or, it could go higher.

[myrdale]

The mechanics of and driving forces behind inflation is something that boggles my mind. The assumed fact that things are always going to get more expensive.

There are more people today than there were yesterday. I would think that would be part of it.

People want to keep pushing up their standard of living. A 32" CRT TV isn't enough, it's got to be a 72" OLED. The car seats must be heated. My washing machine needs to update to Facebook, how else will my friends know when the wash cycle for my socks is done?

Also there are ever more government regulations. All cars must have seat belts. Must have emissions. Must have breathalyzers. All these carry cost that push up the price.

And we live in a world economy. The price of eggs in China very well may have an effect on your shopping in the US.

Linear growth is one thing. Exponential growth is something else altogether, sooner or later, something has to break.

[corn18]

Something will break, but when and how is anyone's guess. This time it is different! Yeah, right.

I pick an AA that helps me sleep at night (50/50) and ignore the noise. Otherwise I would drive myself nuts.

[ua_guy]

My frame of reference is roughly the same time period as the OP.

Prices will come down when they are further subsidized (because things like agricultural production, milk, domestic oil production are already subsidized in the US). Prices will also come down when suppliers need to sustain volume to stay alive.

TV's and cars aren't good examples of inflation. Both of those things have become relatively cheaper over time and are substantially improved products.

[LivingAlmostLarge]

Well you have seen inflation. It happens all the time. It's just usually more gradual. Prices in 2020 before COVID hit weren't the same as they were 5 or 10 years earlier. the difference recently is that the rate of inflation spiked up because of the impacts of the pandemic. We went from 2-3% inflation to 6-7% inflation in a very short time, and many prices have gone up 10-20% practically overnight. And product size shrinkage has been a "hidden" form of inflation for years. Orange juice cartons used to be 64 oz. Now they're 59 oz I think. Ice cream used to come in a half gallon tub. Now it's quite a bit less. A lot of canned goods used to be 16 oz. Now they're 15 or 14 oz. It's a way that manufacturers can keep the price stable by giving you less product. I've always hated that. I'd rather pay more.

No, wages don't move in step with inflation. That's the problem. If wages went up as much as prices went up, there would be no issue. But prices go up a lot faster than wages rise so you lose more and more buying power.

Our first mortgage was 8 or 9%, I don't recall the exact figure. It was fine. We bought a house that we could comfortably afford based on that.

Is the current higher inflation rate transitory? Yes. It won't stay at 7% forever. Once COVID finally settles down and supply chain disruptions ease up and the labor market gets back in shape, we'll get back to more typical inflation of 2-3%, but I have no idea when that will be.

Maybe it won't stay 7% forever but it'll be a newer high price point like kork pointed out that is now going to be inflated. I'm not sure how that will affect financial planning when wages are definitely not going up at all in step with inflation to me. And we're losing purchasing power since the 80s they said the average person is making a lot less. But things also do cost less. At the same time if the gallon of milk is up 10% and then goes 5% then 3% it's gone up a lot. Or cars or homes.

I'm not even sure how homes will react if we ever see 5% mortgages again? Do you guys think it will happen? Higher than 3% 30 year fixed mortgages? Doesn't feel like it.

[myrdale]

TV's and cars aren't good examples of inflation. Both of those things have become relatively cheaper over time and are substantially improved products.

People spend more on TV's and cars now than they did 10 years ago.

[disneysteve]

People spend more on TV's and cars now than they did 10 years ago.

I disagree if you compare apples to apples, at least with TVs. We don't have any big screens in our house. We've got the same 25" screen we've always had, but the one we own now was cheap compared to the one we owned 10 years ago, and it's far better quality.

Now if you replaced your 25" with a 70", sure, you spent more, but that was by choice, not due to inflation.

Cars are more costly, but as mentioned, you're also getting a lot more for your money, so it's not an even comparison. Still, if cost is an issue, you can buy a brand new car for well under 20K.

[disneysteve]

My washing machine needs to update to Facebook, how else will my friends know when the wash cycle for my socks is done?

We need this! The dryer has a loud buzzer that lets us know when it's done, but the washer doesn't. My wife often remembers that she left a load of clothes in the washer hours earlier (or even the previous day). A Facebook alert would be great.
[/QUOTE]

[disneysteve]

Maybe it won't stay 7% forever but it'll be a newer high price point like kork pointed out that is now going to be inflated. I'm not sure how that will affect financial planning when wages are definitely not going up at all in step with inflation to me. And we're losing purchasing power since the 80s they said the average person is making a lot less. But things also do cost less. At the same time if the gallon of milk is up 10% and then goes 5% then 3% it's gone up a lot. Or cars or homes.

I'm not even sure how homes will react if we ever see 5% mortgages again? Do you guys think it will happen? Higher than 3% 30 year fixed mortgages? Doesn't feel like it.

Some prices will come down, like commodities. Others are up for good. That's always how inflation works. And wages have risen many places out of necessity to attract needed workers at a time when there's a huge labor shortage. Those employers in turn have raised prices to compensate. That's not going to go away.

Will we ever see 5% mortgages again? I have no doubt that we will at some point. Of course, that also would mean we'd see 5% CD rates too. Higher interest rates are bad for borrowers, good for savers.

[ua_guy]

People spend more on TV's and cars now than they did 10 years ago.

TV's and cars are a relative value over time, however.... If you take the MSRP of a Ford Mustang in 1966, about $2500, a new Mustang in 2022 is about $27,000 (base model to base model comparison). 27k is higher than the '66's inflation-adjusted MSRP of $19,600 in 2022, but also consider what the Mustang is these days. It's faster, more fuel-efficient, significantly larger, and has a whole crap load of standard equipment that didn't even exist in 1966. The same vehicle in 1966 would not have been obtainable by the target demographic if the technology and engineering had even existed.

A color TV would go for about $1,000 in 1954 (15"!!), or just shy of $10,300 in today's money. Pretty sure I can go buy an internet-connected LED UHD smart TV 65" for $499. Hmm..

[scfr]

I have no clue what will happen. I do know that historically inflation averages 3-point-something. Maybe inflation is just reverting to the mean?

I remember wage increases exacerbating inflation. It's kind of circular, isn't it? Increased wages mean increased costs for companies leading to increased prices.

I can't predict the future (darn it), but what I can do is make a prediction of, not necessarily the worst case scenario, but a possible bad case scenario vis a vis inflation, and then make a plan and take some steps to mitigate the negative effects.

What that looks like for me (some small steps, some medium, some big):

• Purchase the maximum allowed amount of I-bonds.
• Re-run the retirement calculator. I've used 3% expected inflation and 3% expected growth of investments. I think I should adjust it to at least 4% expected inflation (maybe 5% for me since I'm "old"?) but keep my expected growth of investments the same. In the past my goal has been to keep pace with inflation; now I think I should plan with the expectation of gradually losing ground to it.
• Start thinking ahead to when / how much / for how long to invest in CDs when interest rates start to rise.
• Keep managing my pantry well. Buy at today's prices for tomorrow's consumption while avoiding any loss to waste.

Edit to add: For our new home, for items we are buying new, we are trying really hard to adopt a "figure out what we want and then buy it" attitude rather than waiting for a sale. This is hard for us because our "spend time shopping around and then wait for the right deal" habits are so ingrained. Last week DH found a desk he liked. He waited a couple days and the price went up $25 and he was so disgruntled that he decided to keep doing without a desk. Today we bought a TV at full price.

[LivingAlmostLarge]

It's hard to see things getting smaller and the inflation is sneaky in that there definitely is smaller packaging which isn't immediately obvious when you buy but obvious later.