You've Been Thinking About Inflation All Wrong (2022)(ofdollarsanddata.com)
ofdollarsanddata.com
You've Been Thinking About Inflation All Wrong (2022)
https://ofdollarsanddata.com/youve-been-thinking-about-inflation-all-wrong/
11 comments
Doofus forgot about taxes, too.
> Let’s assume that you are being paid $100,000 a year after taxes and you spend $50,000 of it. Well, if inflation hits 10% over the next year, your basket of goods will now cost $55,000 (i.e. $5,000 more) to purchase. How much does your $100,000 salary have to go up to offset this? 10%? Nope. It only takes 5% (i.e. $5,000) for you to break even. This is half the rate of inflation.
That's still not good enough, because even though a raise of 5% would allow one to save the same amount of money, under inflation the money saved is worth less. In fact, to preserve the same purchasing power both in the present and in the future, salaries should be raised exactly as much as inflation.
That's still not good enough, because even though a raise of 5% would allow one to save the same amount of money, under inflation the money saved is worth less. In fact, to preserve the same purchasing power both in the present and in the future, salaries should be raised exactly as much as inflation.
It also assumes all you want your salary to do is help you survive the current calendar year. If we follow their assumption, I have 5k less going towards retirement, savings, or contributions to child care - which is, you'll be shocked to find, a 10% decrease!
It's not like dollars I _didn't_ spend expired, their value was diminished, as was the value of every dollar I'll earn tomorrow, and therefor I'm within my rights to expect more of them.
It's not like dollars I _didn't_ spend expired, their value was diminished, as was the value of every dollar I'll earn tomorrow, and therefor I'm within my rights to expect more of them.
[deleted]
Exactly.
"Did you know if you ignore the effect of inflation on half of your take-home income, you can pretend inflation is half the actual rate?"
Well, no shit.
"Did you know if you ignore the effect of inflation on half of your take-home income, you can pretend inflation is half the actual rate?"
Well, no shit.
... I haven't been thinking about inflation
...
But less jokingly, "you're wrong about X"/"you're doing X wrong" is quite clickbaity
...
But less jokingly, "you're wrong about X"/"you're doing X wrong" is quite clickbaity
The math here only works if you ignore the reduction in savings due to spending more, and the reduction of the value of your savings.
Correct. This article is idiotic. They completely ignore lifetime consumption and only look at current consumption, forgetting that those stocks and other income generating assets are also X% more expensive.
But I can save less, which is a way is money I spend on my future self.
And the value of that gets deprecated through inflation too.
And the value of that gets deprecated through inflation too.
So turns out we’ve all been thinking about inflation exactly correct, and the author picked a clickbaity title.
If the money in your pocket is losing X% of buying power, you need to earn same X% more to compensate.
If the money in your pocket is losing X% of buying power, you need to earn same X% more to compensate.
>If your pay is above your rate of spending (i.e. you are a saver), then you can get by with a raise less than inflation and be the same off.
Inflation hits 'saver's harder because the money sitting in the bank is worth less than if they had purchased a durable good that could possibly be sold for more later.
Inflation hits 'saver's harder because the money sitting in the bank is worth less than if they had purchased a durable good that could possibly be sold for more later.
Inflation hits cash savers. Cash is currency, not a store value.
Durable goods are a form of savings.
Durable goods are a form of savings.
There is no nonperishable good.
Most everywhere you're expected to pay taxes for land, hardware gets used up and requires maintenance etc. Resources can get obsolete and lose value that way too.
So this strategy is not long term savings either.
Most everywhere you're expected to pay taxes for land, hardware gets used up and requires maintenance etc. Resources can get obsolete and lose value that way too.
So this strategy is not long term savings either.
Precious metal.
that's the reason, the article also gives as an advice for savers to invest into income producing assets which also produce proportionally more income as inflation rises instead of sitting on cash.
There are no such assets. Unless you consider slave labor one of these.
There's only so much you cannot increase wages to compensate before people will take matters into their own hands.
There's only so much you cannot increase wages to compensate before people will take matters into their own hands.
"More importantly, this formula leads us to an unfortunate conclusion—inflation has a larger impact on those with lower savings rates."
This a very weird piece. I technically cannot say the math is wrong, but the conclusions reached are simply wrong.
The saving rates ( and other assets producing income ) are meaningless if the inflation swallows it. And if you think inflation protected products are the answer, with increased inflation their entry 'price' will only get higher and more inaccessible to regular folk.
In short, the calculations are not wrong, but they seem to ignore the reality of US population, where 5% inflation and 5% increase in wages at best means a wash.
This a very weird piece. I technically cannot say the math is wrong, but the conclusions reached are simply wrong.
The saving rates ( and other assets producing income ) are meaningless if the inflation swallows it. And if you think inflation protected products are the answer, with increased inflation their entry 'price' will only get higher and more inaccessible to regular folk.
In short, the calculations are not wrong, but they seem to ignore the reality of US population, where 5% inflation and 5% increase in wages at best means a wash.
Is this for real?
Of course if only your expenses increase by 5% and you earn more than that, you may need less than 5% wage increase to cover the increase. But then your 'surplus' is less of a percentage of your wage, and what there is, is now worth 5% less in purchasing power too.
The reasoning, isn't.
Of course if only your expenses increase by 5% and you earn more than that, you may need less than 5% wage increase to cover the increase. But then your 'surplus' is less of a percentage of your wage, and what there is, is now worth 5% less in purchasing power too.
The reasoning, isn't.
I love these arguments: To help with inflation:
>> Have a higher savings rate
Uh, right. So for someone who is just getting by, does not "overspend" and does not have luxury items, how do they do this? I hear over and over the argument is: if you can not save money, you are overspending... well, if you are in the cheapest housing you can get, have no car, no hobbies, no expenses outside of food/shelter/water/electric bills, and you are not saving, what do you do? Too often I hear the well off say "just spend less".
I think the author is trying to get around the idea that people should actually get raises.
>> Have a higher savings rate
Uh, right. So for someone who is just getting by, does not "overspend" and does not have luxury items, how do they do this? I hear over and over the argument is: if you can not save money, you are overspending... well, if you are in the cheapest housing you can get, have no car, no hobbies, no expenses outside of food/shelter/water/electric bills, and you are not saving, what do you do? Too often I hear the well off say "just spend less".
I think the author is trying to get around the idea that people should actually get raises.
A lot of people are commenting on the fact that in a high inflation environment, your savings will themselves be worth less. However, the author is assuming that people will invest their savings, and that those investments will naturally keep pace with inflation.
> By owning income-producing assets such as stocks, farmland, and real estate, your wealth should keep pace with inflation (to some degree) over the long-run.
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Now, I'm not sure if this works. Let's say your investment is going to grow by 10% over five years. If inflation over the same timespan is 5%, you will end up with less spending power than if it was 2%.
However, it probably doesn't make sense to keep those growth numbers constant. Do investments tend to grow more in a high-inflation environment versus a low-inflation one? This is where I don't know enough about economics.
> By owning income-producing assets such as stocks, farmland, and real estate, your wealth should keep pace with inflation (to some degree) over the long-run.
---
Now, I'm not sure if this works. Let's say your investment is going to grow by 10% over five years. If inflation over the same timespan is 5%, you will end up with less spending power than if it was 2%.
However, it probably doesn't make sense to keep those growth numbers constant. Do investments tend to grow more in a high-inflation environment versus a low-inflation one? This is where I don't know enough about economics.
That is wildly out of touch with the majority of Americans who have no meaningful savings much less appreciating assets like stock or property. Even then you have to save half your income for that to work and you have to ignore that you'll have to spend that appreciation down so you're not taking advantage of compounding growth. It's wrong on so many levels.
I read the article as making personal-finance advice, I don't think he meant it as a policy recommendation.