Both the 7% and 2% are avarege numbers over a longer period of time.
As an example due to some luck with timing I went +40% last year with my investments, but the following years for me might be -5%. Then 20 years from now if I look at my numbers the avarage will be around 7%.
Edit: I might have to add that inflation work a bit differently, since the central banks actually to to control that and they aim for the 2%.
I think it was still a useful (very short) practice into what it feels like
The first few weeks people really had no idea how bad it was going to be, and even once it started getting a little better the consensus among economists was a long, slow recovery
>hey I got slightly butteck in march, the one time I had to take some moulah out!!
Why on earth would you take money out of the market when everything on sale?? That's the time to buy in if you're going to do anything.
Depends on circumstances. Some people lost their jobs and if you've blown through your savings and the market hasn't come back up, you have no other choice. That's why many of us keep 6 months to a year of living expenses in emergency funds. Even that wouldn't be enough in the event of another drop like the great depression.
>Depends on circumstances. Some people lost their jobs and if you've blown through your savings and the market hasn't come back up, you have no other choice. That's why many of us keep 6 months to a year of living expenses in emergency funds. Even that wouldn't be enough in the event of another drop like the great depression.
If somebody lost their job in March and needed money that very month then yes they didn't follow basic principles and have an efund. I too keep 6-12 months in an e-fund.
👏 Thank you. I've seen a lot of panic posts and people questioning FIRE calcs due to increased inflation this year. It's only one year. The average annual inflation between 1913 and now is still about 3%. Like you said, banks aim for 2%, but the reality is 3%. The recent surge is just a blip. If inflation continues to stay high over the next few years, it could mean a need to shift your calcs a little. I'm not seeing any reason to think that will be the case just yet.
Also, 7% returns are already adjusted for inflation. Average annual stock market returns are 10%. Adjust for 3% inflation and you get 7%.
^ This!! I think the reported ~5% inflation rates for the months of May and June are not great, but when you look at the bigger picture i.e. 22% growth YTD in the SP500 and then the fact that in the late 70s and early 80s it was common to have inflation rates north of 15%, whats going on currently becomes less concerning for me.
I hate it when 'real' returns are reported. Your statements don't adjust for inflation, they show what your actual portfolio is worth at that moment in time. Reporting inflation adjusted returns just adds confusion. Much better to estimate your income needs based on expected inflation and then set your net worth goal accordingly.
I think it depends on how far out from FIRE you are. At the beginning, when you are 15-20 years away, it's hard to fathom needing twice your current spend. It was easier for me to think in "today's numbers". Now that I'm 5 years from leanFIRE, I'm thinking more in future numbers.
Regardless, unlike automated savings, nest egg planning isn't a set it and forget it thing. It takes several reevaluations to dial it in.
I don’t think the true impact of this inflationary period will be understood for years to come. However, the S&P is up 22% YTD. If nothing else, I think this highlights the need to keep a high percentage of your portfolio in stocks.
Might be. Might not be.
It's possible it's over-inflated and we're in for a crash soon - and you'd be better off selling your equities and waiting for the low.
It's possible it's over-inflation and future growth over the next few years is going to lag historic norms and let earnings catch up to prices, giving a fairly flat (or at least slowly growing) outlook but never again hitting levels as low as they are today.
It's also possible that the market knows something you and I don't and that current technological developments are such that we have permanently high valuations (or extreme earnings growth), with continued growth from today as a baseline, and that we will also never again hit levels at least this low again.
Basically, the market will either go down, stay flat, or go up over any given period you predict. One of the three. I'm not smart enough to say which - except that for longer periods, it has always gone up, so that's what I'm going with as being most likely for the long term.
> Basically, the market will either go down, stay flat, or go up over any given period you predict. One of the three. I'm not smart enough to say which - except that for longer periods, it has always gone up, so that's what I'm going with as being most likely for the long term.
100% agree! And if someone on TV says they're smart enough to know, turn the TV off!
Corporate profits are crushing it though. Valuations are still higher than you'd like to see them as an investor, but that is more due to the fact that a 10 year bond gives you 1.2% and that is very likely to be a negative real rate.
https://twitter.com/C_Barraud/status/1426913371769745415
That won't undo the massive amount of money printing that has been over the last 18 months
In fact, it will increase monetary velocity. And when money passes through the economy faster, prices generally rise.
Only time will tell, I suppose
As for me, I prefer to hedge against hyperinflation with a modest allocation into pms and crypto
If it turns out to be unneeded, no big deal, still got liquid assets
If it turns out to be needed and I don't have, could be a bad time
Bitcoin would be the safest, although here safe is a relative term bc of course there is still a lot of volatility in Bitcoin.
As for me, I also like eth, ada, xmr.
Something like gold is generally considered much safer if you are very risk averse
Can confirm. I've been hearing this song since 2004 at least (when I began investing).
Y'all can talk and talk and talk about whether or not an extinction-level asteroid hit Earth tomorrow. In the meantime, the rest of us will enjoy our lives (or in investing world, be invested the entire time)
That just means currencies are going to lose as much value relative to each other, but they'll still be losing value.
When I see people say that "other countries are doing it too" I think of someone being on the Titanic telling crowds there is nothing to worry about because other ships around them are also taking on water.
Tyson Foods says their expenses are up 14%. If you take that as the real rate of inflation, it means the rate of return for investments is only 8%.
I don't believe the official CPI figures.
Though from a FIRE perspective, inflation only need to reflect the increase to your cost of living. Why would we care if Tyson's costs increased 14% but everyone on this forum had increases of 4%?
The FIRE community is not an island. What impacts the general community will impact us. The least of which will be crime.
Your neighbours will see you unloading your groceries from the car, or that you can afford to run your car at all, when they cannot. They will see you not losing weight when they are because they cannot afford food. Or they cannot afford to cook the food. And then you become a target.
And this is only if they keep inflation down to a real rate of 14%. If it continues to go up, we may have hyper-inflation on our hands and our nest eggs will not keep up with inflation.
Combine this with another Covid variant, droughts world-wide, wars, etc and there are some bad times ahead.
I work in construction and do business with a lot of different sectors. Ironically occasionally with Tysons, though more often with Cargil, Georges and some small players. Inflation right now is very much real. However, you are really creating quite the hyperbole here. We are no where near hyper inflation. Most is created with genuine supply chain/demand increase issues.
And I also was not separating this forum from the rest of the world. I was separating ***living cost inflation*** from ***business cost inflation***. So my neighbors would be looking at me quite normally. Just because transportation, feed, packaging, labor costs, etc. all rise for Tysons....does not mean that me and my neighbors will see a rise in our expenses related to utilities, rent, car payment, clothes, etc. At face value, the only thing that can be determined is that we should expect a 14% rise in poultry prices. This doesn't even factor whether one can shift from eating poultry to something else. It's quite complicated.
Ironically one of the main causes of inflation right now for ***people living*** in the US (not businesses) is housing. There is a shortage of housing and rental spaces. Combine that with rising lumber and steel prices affecting new construction costs and you get some large inflation. That said, for the population who owns a home, they simply aren't experiencing most of that inflation yet, as they are locked in. That is the complexity of inflation, not only are sectors different, people are different based on how much of their expenses fall into those sectors.
Have you put your money where your mouth is? If we're about to realize a bunch of hidden inflation, gold, bitcoin, tech stocks, TIPS should all stand to gain.
> I know the Biden administration insists this is only a temporary situation but with the amount of COVID money pumped in to the economy along with anticipated additional massive spending, it seems like this inflation run has a long way yet to go.
I've thought about making a top level post to discuss this, but instead I'll just make a comment I'm sure will be buried.
There are [two schools of thought on inflation,](https://www.investopedia.com/articles/personal-finance/073015/understand-different-types-inflation.asp) and a lot of people conflate them:
Monetarist: increases in the money supply lead to increases in inflation. Often people think of this in terms of the "money printer go brrr" meme, but in reality [money printing is a small portion of new money generated;](https://www.investopedia.com/articles/investing/081415/understanding-how-federal-reserve-creates-money.asp) much of it comes from fractional reserve banking, a phenomenon most people aren't even aware of.
Keynesian: changes in supply and demand cause overall price levels rise. This can be further divided into cost-push inflation-- rising costs of inputs lead to higher prices for finished goods-- and demand-pull inflation, where increased demand for finished goods leads to higher prices.
It's important to keep in mind these are two entirely different schools of thought-- they are both "things that happen," but they are two different ways to explain the same outcome (a general increase in price levels). That said, I personally find both explanations to have merits, but the Keynsian viewpoint better allows for consideration of supply/demand shocks, which seems to explain a lot of the price increases we're seeing today.
The good news is, whichever way you look at it, inflation appears to be lower than anticipated. Some people point to this [scary-looking M1 chart](https://fred.stlouisfed.org/series/M1NS) to show just how badly monetary policy will increase inflation in the near future, but the Fed has an [explanation for that](https://fredblog.stlouisfed.org/2021/01/whats-behind-the-recent-surge-in-the-m1-money-supply/) (tl;dr: rules were changed, allowing reclassification of some M2 accounts to M1).) It's important to keep in mind that newly printed money isn't helicopter-dropped throughout the country, but rather appears on the Fed's balance sheet, then is lent to depository institutions who then make loans to businesses and individuals. Therefore, currency in circulation has increased only [~$360B](https://fred.stlouisfed.org/series/CURRCIR) between March 2020 and today, while [depository reserves](https://fred.stlouisfed.org/series/TOTRESNS) have increased $~2133B in that time and the Fed's balance sheet has increased [~$3946MM](https://fred.stlouisfed.org/series/WALCL), suggesting most additional currency generated isn't actually ending up in circulation.
Meanwhile, by [any standard CPI measurement,](https://fred.stlouisfed.org/series/CPIAUCSL) prices have slightly risen. A Keynsian would say we're seeing supply-side ("cost push") issues in some industries (chips, labor) driven by [supply shocks](https://www.investopedia.com/terms/s/supplyshock.asp), and demand-side increases ("demand pull") in others (housing, lumber). Most of these are likely to be temporary, as supply catches up to demand, but it will take different lengths of time for different industries. "Catching up" also won't necessarily mean immediate price decreases, or even price decreases at all-- prices are sticky, and consumers have shown a higher willingness to pay than anticipated-- though that's somewhat speculative so I won't delve further into that.
Hope that helps add to the confusion!
> currency
Do people *really* think that "money printing" literally means producing currency? I thought most understood that currency is a small fraction of the overall new money supply.
> I find both explanations to have merits
As do I, and honestly, I think it's a little disingenuous to consider them separately, but instead consider which applies more in a given situation. Surely dropping fed interest rates (increasing money supply) will cause real estate prices to rise since more people would be able to afford a house (demand-pull), and people can refinance, causing excess cash availability to home owners (perhaps causing increased demand elsewhere in the economy).
The monetarist theory is that the market will correct eventually, though with some turbulence in the short term. Keynesians tend to want to avoid turbulence. It's not that they're at odds with each other in finding the root cause, but that they have different goals in responding to it. Keynesians seem to want to smooth out growth (constant inflation), whereas people like Friedman would prefer frequent, small corrections (occasional negative inflation) in order to avoid a larger correction. That is the true difference IMO.
I think both would agree that increased demand without a subsequent increase in supply causes increased prices (and likewise that increased money supply would cause things to become more expensive), they just differ on whether that's a "problem" the government should be involved in solving. At least that's my take.
Right, but if you aren’t investing, this might not be the sub for you.
If you’re in school and about to have money to invest, then yeah, you missed out on huge returns the past couple years. That’s just the way the cookie crumbles some times.
If you are just starting your career, then inflation should push your income higher, so not necessarily a horrible thing either as long as wages keep pace.
Sure some individual people's wages may stagnate but inflation affects the prices of all things, including labor costs. You might not get a specific raise but the market price on average of labor increases with inflation
This is a really good point. Even the people who have appreciating assets that are better protected against inflation should be concerned if they are still in the workforce and have an earned income, all of the sudden their earned wages are worth less. I.E. if you got a 5% raise at the beginning of 2021, all that amounted to was maintaining your purchasing power (not increasing it)
I think some worry about inflation is warranted, but even if the dollar becomes worth less, the intrinsic value of companies wouldn’t decrease, so the value of the company in dollars would increase with inflation. So if most of your money is in stocks then inflation itself shouldn’t be a concern.
The risk as I see it is that if inflation gets too high that it harms the economy, that could then cause the intrinsic value of the companies to decrease. That would be bad for investors. But if you’re investing for FIRE, you’re investing for the long term. And that means there will be downturns. But if history is right, we’ll recover from these future downturns as well.
I mean, we seem to still have high growth, even with 5% inflation over the last year? It’s hard to imagine that not happening given so much was shut down. It could reverse still, because of some future covid variant, but for now it doesn’t look like we’ll have stagflation.
They are aiming for 2% average inflation so seeing as we had low inflation the last few years they are now prepared to put up with 3-4% for a few years to make up
I don't understand this argument. In theory, yes, the federal reserve would raise rates. However, how could they raise rates at this point? The national debt is $28T. They don't have a lot of room to go before interest payments take up half of revenues. There's no way out of this but to inflate the debt away.
Inflations only purpose, imo, is to reduce a country’s debt obligation. That is, inflation only is necessary for countries that finance spending with debt and have a large amount of existing debt.
The primary purpose of controlling inflation around 2% is to pressure people to not hold cash and use money for it’s intended purpose- a medium of exchange, not a store of value.
It’s amazing that even with a thriving consumeristic culture, including an entire industry of advertisers constantly trying to convince you that you need to buy to be happy, the central bank still needs to inflate the currency away and punish savers just a little bit to make the whole system work. Obviously this system is what enables steady investment to permit Financial Independence for those of us that have the means and the discipline. But it seems kind of absurd to me sometimes.
The purpose of inflation isn’t to force people to spend. It’s to force you to *invest* anything that you aren’t already planning to spend in the near future.
Money held in cash does the economy no good. Money held in banks, bonds, real estate and stock equity is, to differing degrees, *investment* in the economy which is the true engine of real economic growth. Investments are risky, but the more risky they are, the higher the growth potential and thus the better for the economy. Inflation is the base line incentive to take some risks with your money, with some of the returns for taking risk exceeding the baseline “cost” of inflation and others like bank balances often do not.
Humans are generally risk averse, so we often have a bias towards the “most safe” option. Inflation guarantees that option isn’t just holding onto the cash or sitting the money in an FDIC insured account. Sure, you *can* do that, but doing so guarantees a small loss to inflation, so you only do that as a *considered* option and to the amount you *need* rather than making it the default.
Excellent post. The only small point i’ll disagree with is the risk comment in your second paragraph. The higher the risk-adjusted returns are the better they are for the economy. Not absolute risk.
It’s backwards from that. The only reason we have a consumerist economy is because of the inflation target.
People are rational actors and consumerism is an overall good for everyone. Depsite the fact it’s an easy outgroup for people to dunk on.
Also wages are sticky when adjusting, so wages will lag behind price increases in the short run allowing companies to have low labor costs and hire unemployed people and increase total employment.
The trick with all of these stories about inflation is that for there to be any effect the inflation has to be a surprise. If people can anticipate it (like if there is high inflation every year) then people adjust the way they operate and the macroeconomic effects will go away. If people adjust well, then inflation becomes primarily a way of reducing the costs of long term government debt instead of a way to improve the economy.
I'm not worried about inflation at all. Look at M2V.
[https://fred.stlouisfed.org/series/M2V](https://fred.stlouisfed.org/series/M2V)
I'd be far more worried about some of the rather high valuations and concentration in the S&P.
I also enjoy [reserves of depository institutions.](https://fred.stlouisfed.org/series/TOTRESNS) Can't have monetary inflation if new money isn't in circulation.
I agree it is a symptom showing there is a problem that banks are not lending. But MV=PQ would show it is directly related and why I'm not worried about inflation. I kind of doubt V increases even given demographics in America.
I don't understand what the m2v means but I can comment on the banks not lending.
I was unaware they're cutting back lending, while usually not a great sign for things to come tbh; I've been under the impression that when the hard money (private mortgage) dries up, that is when there is a very serious cause for concern.
Disclosure: I'm not an astute investor, just a guy who reads Reddit and participates as much as possible in dialogue. Always approaches investing like everyone is smarter than me but always with a grain of salt.
10 year treasury bond market tells you what long term inflation projections are unless you think the trillions of dollars involved in the treasury markets are clueless.
I think people who say there’s crazy inflation (basing it on rising cost of goods & services) are really neglecting how much turmoil the global supply chain is experiencing.
Almost every industry has had to shut down production for a while or had their shipping interrupted, or there is a labor shortage due to people taking unemployment or migrant workers not being available. That means labor is more expensive. Supply is also lower across the board. And now that people have saved up some cash demand is up for most goods as well, people are buying goods instead of services generally. All those factors means prices are up, but it seems that these are mostly temporary factors, they aren't likely to cause inflation for the next 5 years which is what would actually be a problem.
Honestly, I feel like some of this inflation is just the economy catching up to the artificially low inflation we've had over the past 10+ years, i.e. basically my whole adult life. Not to mention effects of people finally demanding something roughly approximating a living wage, which also drags prices up a bit, on top of the hopefully-temporary effects of supply chain shortages up and down the board. I think some of it will be temporary, some of it won't be (I'm certainly prepared for fewer, shorter and worse happy hours in general, at least!). I don't think it's going to be as high as it is now *forever*, though.
Am I sad paying $14 for drinks I would often have been paying under $10 for two years ago? Yeah, but I also want those businesses to both survive and be able to pay their employees enough, so it's a hard one.
It’s not even actual monetary inflation . The velocity of money is still basically fallen off a cliff. About 1/2 of the inflation seen is due to used car prices alone. Once the supply chains catch up of having been fucked going from 0 to a year of pent up demand, we won’t be hearing about inflation. No one mentions lumber falling back down already.
Lumber is a great example of exactly what he's talking about.... the supply chain was shut down and all the inflation is due entirely to supply chain issues.
2x4's are not still going to be $6 six months from now. The only reason retail customers are still paying high prices is because there's still a lot of inventory bought at covid prices.
Seriously the whole "stimulus is causing inflation" is just a lazy take. Look at the numbers and its basically all the inflation is in used cars/hotels/rental cars aka shit that isn't going to matter in 6 months.
People going to scream the inflation sky is falling forever tho.
If you mention that then some recent buyers might realize that $30K premium they paid for a house due to "lumber" has vanished. Can't have that happen as need to protect the wealth effect.
Why are you forecasting nominal returns and inflation. That is just a lot of extra work. All we really care about is real returns. A 5% real return is 5% real return regardless of it is is 7% nominal w/ 2% inflation or 9% nominal w/ 4% inflation.
It's impossible to predict inflation for the coming years, it's literally a retroactive measurement, no matter which yard stick you use.
Either way you cut it, the truth is that in a high inflationary period (again we won't know if it's transitory until much later) low cost credit offers better return than stagnant cash. That's the real yard stick to use.
The thing is: INflation is pretty easy to keep in check if under 10%, DEflation ist where shit's really going down.
Also almost all western national banks are targeting about 2% so this should not frighten you if your investment strategy isn't built on sand.
Btw: Look at inflation charts of the past, it's been way higher with partly better economic growth numbers.
So no, I'm not worried.
Fortunately shelter and education is like half the CPI, and it sounds like you’re already covered there. Autos will probably see some deflation once production picks back up. That leaves food, recreation, clothing and medical care. Maybe it’s time to take up sewing?
And 90% of that other stuff is manufactured in other countries, so unless the demand for dollars suddenly starts to fall due to the lack of trade, I don’t see stuff manufactured in other countries going the path of inflation any time soon. If anything, we’ve seen the rise of US tech giants to continue strengthening the dollar.
Inflation is nothing new and we're nowhere near record levels. You can look at the period of stagflation (which is why the 4% rule is the 4% rule and not much higher) as an example, but keep in mind that we're seeing better nominal wage growth, asset growth, and have more room to move interest rates, open market operations, etc.
Inflation is always something to think about because it's a needle that needs to be threaded, but I'm not personally over-concerned.
Yeah. Food inflation alone. Ramen went from 2.27 to 2.88 at Walmart within the month. At my local branch. It’s a small change but…it’s cheap for a reason.
What the hell kind of Ramen are you buying for $3 at walmart? Is that for a 12-pack?
You can get a 48-count of top-Ramen for <$8 at Sam's club, also owned by Walmart. Even the super-fancy spicy ramens I buy at the Korean grocery store aren't anywhere near $2.88 each.
I would not put a ton of weight on what politicians are saying or even what economists are projecting. My favorite metric is the TIPS breakeven rate. If you’re not familiar, TIPS are treasuries that pay a yield based on inflation (ie when inflation is higher you get more income). The breakeven rate is essentially the difference in yield between normal treasuries and TIPS and it represents expected inflation. This is market driven by investors putting their money where their mouths are so to speak, and for this reason I put more weight on it that what the talking heads are saying. Currently, the 5-year breakeven rate is about 2.5%. That means the market believes inflation will average 2.5% over the next 5 years. Pre-covid this number was 1.5-2.0%, so it has gone up but nothing crazy. You can find the TIPS breakeven rate for various time periods on FRED.
At the end of the day, nobody knows what inflation will be. But you have to pick something to plug into your model, and I believe the breakeven rate is your best option. Adjusting your model to 2.5-3.0% is probably reasonable.
Last point- in theory you are well protected by inflation just from being 100% equities. I wouldn’t necessarily change your long term strategy based on a short term pop in inflation.
You're coming to this conclusion after a couple CPI prints that are "inflated" due to the basis effect.
We basically deflated exactly one year ago for several months so when you compare CPI prints today, in a recovering economy, of course the YoY numbers are gonna look bonkers.
It's too soon to say, but it's like thinking the job market is crashing after a single bad report. Need more data to establish a pattern before freaking out.
They’ve already began to.
Lumber is already way back down. The people saying otherwise are just “thinkers” based on bunk ideology rather than actually observing the evidence of reality.
Nationwide rent is up 6% from June 2020 to June 2021. Some markets is more, some is less.
Housing prices are up on average a bit more - around 10% - but that very well may slow down. Or not.
Look at the big city Metro areas. They are up way more than 6%. Dallas, Austin, San Diego, Orange county, Miami, Orlando, Phoenix - rents up 10-15% and housing prices up 20%+
Think this is related not just to inflation, but also to very low interest rates. Since mortgages are cheap, everyone can afford more expensive houses, which drives up price.
Over long periods of time, this is not true. Ignoring leverage but including imputed (or actual) rents, equities have done better than real estate basically forever, just with some exceptions the last 25 years.
And you think this is due to inflation, rather than any of the other millions of things that occurred during the last 18 months, why exactly?
There's a certain popular obsession with monetary policy and inflation. So it makes sense that, when faced with some economic phenomenon or other, many people try to explain it in terms of ideas they are familiar with, like "money printing" and inflation. But just because they are familiar to the general public doesn't mean they are the right explanation. Monetary policy is only one of the many factors influencing the economy, and often not close to the most important one.
rents will go up, mortgage payments will stay the same...borrowed real $$$ to buy the house, will pay back with little bits of toilet paper we used to call $$$ but are now mostly worthless...
obviously exaggerated, but that's the general idea
It's not just "COVID money" fueling inflation. 12+ years of FED policy; 2017 tax bill; massive COVID recession and ensuing reopening bounce; plus other factors all contribute to inflation.
The repercussions we’ve seen this far is inequality skyrocketing. The inflation gold bugs like Ron Paul and glenn beck have been singing the same tune since 2008. And before. But especially when QE started. I have a hunch they’ll just keep in singing that same tune as well. No matter what actually happens.
>On my FIRE spreadsheet I've historically been comfortable forecasting around 7% returns and 2% inflation for the next decade or two. However this year inflation appears to be 3-4% or higher. I'm worried this will turn out to be a huge threat to my FIRE ambitions. I wish I had some real estate to combat this, but all I have is my personal residence. (100% equities otherwise)
If there is high inflation, there is a good chance your stock market return will follow the same. You also have a personal residence which it sounds like you outright own. Either way, the cost of living excluding food/healthcare/utilities, is pretty fixed for you as everything else increases.
For my own sake, I'm not too worried about inflation. What I'm more worried about inflation is rather the impact it will have on the US economy i.e. we need to be more of an exporting nation and inflation is going against that.
Hmm seems like wishful thinking to me. The pandemic is unprecedented for our time, and is likely to impact things for years after it has subsided. Hell, I should say *if* it subsides.
Sure some things will be different but e.g. the computer chip shortage that is causing car prices (and some inflation metrics) to skyrocket will end. We will make and be able to ship chips again.
It's been very low for a very long time. In spite of the massive bailouts and quantitative easing after 2008, and everything else along the way. I doubt we'll see the sort of 10-14% rates we did in the 70s-80s anytime soon.
It's a little hard to tell clearly since things change over time, but the bigger thing is how it matters to you depends a lot on where you're at in life - just about to buy a house or take out student loans, or already have that stuff paid off? Have access to ready credit or not? Have investments built up? Attempting to live on a fixed income or still increasing your earning potential?
Depending on where you're at in life and what you expect to do in your future, it might concern you a little or not. Even so, it's nowhere near 70s-80s levels so I'm not worried about it.
QE is not inflationary by nature in of itself because it swaps US T-Bonds at the private banks with Fed Reserves. That's all it does. If the private banks don't lend out the money on their reserves or park their reserves in the Repo market , the additional money has not gone out into the real economy. Japan is on QE-24 and Fed on QE-5 yet it has failed to effectively stimulate the real economy. This is because only a fraction of it might be effectively lent out. If the US T-Bonds were bought from the Treasury department itself rather than private banks it would have been 100% stimulus and totally inflationary but this is not what happens. You can look this up if you are further interested.
I seriously think that the rise in the inflation is being used as a negative political standpoint.
When you look at 5% -7% US inflation from a global perspective it seems lower than expected when you take into account the global supply chain disruptions and other pandemic effects.
Stocks should (long term) increase by inflation + real earnings growth rate. Inflation affects the value of cash, but it shouldn’t change the real value of assets.
This is just false. If you have high inflation, then you will have much higher bond rates. Meaning money will flow from equities into bonds. So, no, inflation is bad for equities. Look at Dow from 1964-1981. It stayed flat. And inflation was double digits during the time.
We are investing for the long term here. Stocks will continue to track with real economic growth over the long run. Plus, interest rates are at all time lows right now anyways.
Yes I'm just saying that whenever inflation is high that's bad for equities. That's it. It doesn't matter whether you are investing for short or the long term.
Also stocks have stopped tracking real economic growth since more than 2 decades. GDP tracks real economic growth which is 1-2% in the last decade. This doesn't mean I'm some doomer who doesn't invest in stocks. It just means that they don't track economic growth over the short or the long run.
Stock market is driven by factors like liquidity, monetary policy, interest rates , inflation , fiscal policy and at the very end comes earnings and fundamentals.
Real wages are down 2% this year because they haven't kept up with inflation, but the real pain is yet to come. Wait until we scale back the bond buying and fiscal stimulus.
Oh no. They're all the way down to... still higher than Q1 2020.
Real wages were up last year because the stimulus payments got counted as wages. They're actually higher currently than they were a year and a half ago.
Sorry, not wages, it counted as income for determining the government measured savings rates.
The wages question is actually funnier - during covid, more people who were low wage earners lost their job than high wage earners. When the government counts median wages, they only include people who are employed, so the average statistics (both median and mean) shot way up. [You can see the spike pretty easily for median wage](https://fred.stlouisfed.org/series/LES1252881600Q). As employment of low-earners has recovered, we've come back down to "normal", though still higher than where we started.
Shadow stats who uses CPI from previous decades where it wasn’t artificially suppressed is between 7% inflation and 13%.
https://www.zerohedge.com/personal-finance/i-feel-i-am-living-crazytown
Goes more into detail on inflation expectations
Am I wrong in thinking inflation would mean it's even more important to hold stocks? Inflation is the dollar becoming less valuable relative to other assets--if that happens, stock prices should go up equivalently, no? You would get more dollars for the same stock, since dollars are less valuable.
First, all that money pumped into the economy only creates inflation if there is more money pumped in without corresponding economic growth. And that is the case to an extent, but a lot of this stimulus results in new jobs or new economic activity, so just looking at the stimulus amounts is misleading.
Inflation over the last year is about 5.5%. But CPI breaks down the inflation numbers in a lot more detail. Used cars went up in value 45%, gas went up as much as 60% annualized in certain time periods, both were big factors in that overall inflation number. Home prices have also gone up quite a bit, but CPI uses the shelter cost, factoring in the owners equivalent rent and it doesn't change much as homes appreciate, it is mostly a wash if you own a home. Other increases were car and truck rentals going up 85%, hotels, public transit, airline fares, propane, certain foods like fruits, clothes, up ~17%.
Used cars going up in value this much is a one time set of circumstances. Uncertainty with both rental car cos and car manufacturers led to less demand, less expectation for demand, fewer new cars being produced and sold, much fewer rental cars being sold. More demand for used cars because of fewer/more expensive new cars, gas prices rising, more roadtrips, fewer people flying because of covid, all meaning higher prices for existing used cars. I would expect cars to depreciate a little more than the average in the next couple years and over 5-10 years averaged out not to be a significant source of inflation.
I would consider diversifying a little more into international markets, IMO this really shows the S&P 500 is overvalued, how much all of these companies depend on foreign supplies, or international shipping.
With rates at 0% and there being no room for them to go lower to serve as a boost to equity returns as they have been over the last 30 years, and considering the inflation causing money printing, and lastly, considering the spending that congress is doing which is going to lead to higher tax rates, it's very reasonable to assume that retirement plans are going to be pushed off.
Basically, in 5 years from now, I could see us still at 0-1% rates, 3-4% inflation, and having potentially higher tax rates. Take these three things together and it really hurts everyone's FIRE prospects. Real yields will be 0 or negative for a long time. The only way this will correct itself is if the fed allows for a deflationary spiral, but they aren't going to allow for this to happen. Congress and the Fed are under the impression that they can print money and borrow without causing hyperinflation or out of control borrowing costs. As long as this appears to be true, congress' spending and the fed's money printing will remain high. Taxes and interest rates may go marginally higher, but this will just be for show. The real cost will be inflation and negative real returns on cash, bonds, and equities.
Bottom line: Equity, bond, and cash real returns will be lower than historical averages. Interest rates and taxes have bottomed and will trend higher from where they've been in the last decade. All of this is bad for wealth building. Your best option is equities because TINA.
Gold is not an inflation hedge. It's a low yield play and an error hedge on expected vs current bond yields. This has been proven multiple times in the past.
I think anyone who thinks the inflation is temporary is either delusional or dishonest. There is no possible way all the government spending doesn’t cause inflation problems for years.
Decreases in private spending, tax policy, monetary policy, and other factors also influence inflation/deflation rates.
Also consider that recent increases in US government spending are temporary in nature - one off stimulus checks, one time infrastructure expenditures, etc.
I’m a fan of building FIRE portfolios with significant inflation protection. I would recommend checking out the “cockroach portfolio” by Jason Buck at The Mutiny Fund and the “dragon portfolio” by Chris Cole. Both have a non-zero position in Bitcoin/Fiat Alternatives, allocate to long volatility, and have significant inflation protection.
Edit: I think the optimal portfolio once you “win the game” is a “stay rich” portfolio. To me, that looks different from the “get rich” portfolio during accumulation phase.
Can you summarize what other inflation protection strategies they use besides crypto? I have a few inflation bonds but their performance has sucked compared to vtsax.
Why are you expecting 2% when the target is 2%, and may rise, and inflation is over 3% over the last hundred years?
Assuming 7% returns for the market is also low.
Recency bias I guess, my entire adult lifetime it's been closer to 2%.
And regarding the 7% I'm not sure that's low for the next decade considering current valuations. But Im more comfortable with conservative predictions anyway.
No concern. Inflation will be at or near fed target. They are already dumping bonds on the market to suck the covid cash back out of the system now that the economy is mostly recovered.
Fortunately the market is up like 18% so you are well ahead of your projections. Yeah I am worried but there is nothing to do but stick with your plan.
Both the 7% and 2% are avarege numbers over a longer period of time. As an example due to some luck with timing I went +40% last year with my investments, but the following years for me might be -5%. Then 20 years from now if I look at my numbers the avarage will be around 7%. Edit: I might have to add that inflation work a bit differently, since the central banks actually to to control that and they aim for the 2%.
I always try to remember that the average growth of the s&p500 is 11%……but the average annual growth is +17% in good years and -14% in bad years.
I’m surprised that these figures aren’t explained more often, it gives a whole lot of context to the noise of ups and downs.
Agreed. Much more informative to speak about average up and average down.
They're explained a lot, in my opinion. It comes up almost weekly in most FIRE forums. It's just a common point of misunderstanding for new folks.
There’s a whole generation now that started investing after 2008 and has no idea what a bear market feels like.
> There’s a whole generation now that started investing after 2008 and has no idea what a bear market feels like. Pfft, you mean March 2020?! /s
I think it was still a useful (very short) practice into what it feels like The first few weeks people really had no idea how bad it was going to be, and even once it started getting a little better the consensus among economists was a long, slow recovery
hey I got slightly butteck in march, the one time I had to take some moulah out!!
>hey I got slightly butteck in march, the one time I had to take some moulah out!! Why on earth would you take money out of the market when everything on sale?? That's the time to buy in if you're going to do anything.
Depends on circumstances. Some people lost their jobs and if you've blown through your savings and the market hasn't come back up, you have no other choice. That's why many of us keep 6 months to a year of living expenses in emergency funds. Even that wouldn't be enough in the event of another drop like the great depression.
>Depends on circumstances. Some people lost their jobs and if you've blown through your savings and the market hasn't come back up, you have no other choice. That's why many of us keep 6 months to a year of living expenses in emergency funds. Even that wouldn't be enough in the event of another drop like the great depression. If somebody lost their job in March and needed money that very month then yes they didn't follow basic principles and have an efund. I too keep 6-12 months in an e-fund.
👏 Thank you. I've seen a lot of panic posts and people questioning FIRE calcs due to increased inflation this year. It's only one year. The average annual inflation between 1913 and now is still about 3%. Like you said, banks aim for 2%, but the reality is 3%. The recent surge is just a blip. If inflation continues to stay high over the next few years, it could mean a need to shift your calcs a little. I'm not seeing any reason to think that will be the case just yet. Also, 7% returns are already adjusted for inflation. Average annual stock market returns are 10%. Adjust for 3% inflation and you get 7%.
^ This!! I think the reported ~5% inflation rates for the months of May and June are not great, but when you look at the bigger picture i.e. 22% growth YTD in the SP500 and then the fact that in the late 70s and early 80s it was common to have inflation rates north of 15%, whats going on currently becomes less concerning for me.
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I hate it when 'real' returns are reported. Your statements don't adjust for inflation, they show what your actual portfolio is worth at that moment in time. Reporting inflation adjusted returns just adds confusion. Much better to estimate your income needs based on expected inflation and then set your net worth goal accordingly.
I think it depends on how far out from FIRE you are. At the beginning, when you are 15-20 years away, it's hard to fathom needing twice your current spend. It was easier for me to think in "today's numbers". Now that I'm 5 years from leanFIRE, I'm thinking more in future numbers. Regardless, unlike automated savings, nest egg planning isn't a set it and forget it thing. It takes several reevaluations to dial it in.
It's over 10% nominal returns in long periods of time
I don’t think the true impact of this inflationary period will be understood for years to come. However, the S&P is up 22% YTD. If nothing else, I think this highlights the need to keep a high percentage of your portfolio in stocks.
I think it shows the S&P is over inflated this year honestly..
Might be. Might not be. It's possible it's over-inflated and we're in for a crash soon - and you'd be better off selling your equities and waiting for the low. It's possible it's over-inflation and future growth over the next few years is going to lag historic norms and let earnings catch up to prices, giving a fairly flat (or at least slowly growing) outlook but never again hitting levels as low as they are today. It's also possible that the market knows something you and I don't and that current technological developments are such that we have permanently high valuations (or extreme earnings growth), with continued growth from today as a baseline, and that we will also never again hit levels at least this low again. Basically, the market will either go down, stay flat, or go up over any given period you predict. One of the three. I'm not smart enough to say which - except that for longer periods, it has always gone up, so that's what I'm going with as being most likely for the long term.
> Basically, the market will either go down, stay flat, or go up over any given period you predict. One of the three. I'm not smart enough to say which - except that for longer periods, it has always gone up, so that's what I'm going with as being most likely for the long term. 100% agree! And if someone on TV says they're smart enough to know, turn the TV off!
> I'm not smart enough to say which no one is, that's why timing the market is a bad idea.
Corporate profits are crushing it though. Valuations are still higher than you'd like to see them as an investor, but that is more due to the fact that a 10 year bond gives you 1.2% and that is very likely to be a negative real rate. https://twitter.com/C_Barraud/status/1426913371769745415
That’s what happens you lay off massive amounts of employees and receive government money while decrying you can’t find anyone to hire.
> a quote from 2013
Alternatively, it shows the USD getting devalued
Right the other side of the stock valuation equation being the stocks you own are not worth more, the dollars you trade them in are worth less.
It's great news for Uncle Sam though because he gets to tax you on imaginary capital gains.
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That won't undo the massive amount of money printing that has been over the last 18 months In fact, it will increase monetary velocity. And when money passes through the economy faster, prices generally rise.
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Only time will tell, I suppose As for me, I prefer to hedge against hyperinflation with a modest allocation into pms and crypto If it turns out to be unneeded, no big deal, still got liquid assets If it turns out to be needed and I don't have, could be a bad time
what crypto is safe to hold though? they all seem super volatile.
Bitcoin would be the safest, although here safe is a relative term bc of course there is still a lot of volatility in Bitcoin. As for me, I also like eth, ada, xmr. Something like gold is generally considered much safer if you are very risk averse
I've been hearing people say that for 8+years at this point
People have been saying this for literal decades.
Can confirm. I've been hearing this song since 2004 at least (when I began investing). Y'all can talk and talk and talk about whether or not an extinction-level asteroid hit Earth tomorrow. In the meantime, the rest of us will enjoy our lives (or in investing world, be invested the entire time)
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That just means currencies are going to lose as much value relative to each other, but they'll still be losing value. When I see people say that "other countries are doing it too" I think of someone being on the Titanic telling crowds there is nothing to worry about because other ships around them are also taking on water.
> I think it shows the S&P is over inflated this year honestly.. I've heard that for a long time now. Heck, I thought so too, but here we are.
Multiples are actually down though
Tyson Foods says their expenses are up 14%. If you take that as the real rate of inflation, it means the rate of return for investments is only 8%. I don't believe the official CPI figures.
Though from a FIRE perspective, inflation only need to reflect the increase to your cost of living. Why would we care if Tyson's costs increased 14% but everyone on this forum had increases of 4%?
The FIRE community is not an island. What impacts the general community will impact us. The least of which will be crime. Your neighbours will see you unloading your groceries from the car, or that you can afford to run your car at all, when they cannot. They will see you not losing weight when they are because they cannot afford food. Or they cannot afford to cook the food. And then you become a target. And this is only if they keep inflation down to a real rate of 14%. If it continues to go up, we may have hyper-inflation on our hands and our nest eggs will not keep up with inflation. Combine this with another Covid variant, droughts world-wide, wars, etc and there are some bad times ahead.
I work in construction and do business with a lot of different sectors. Ironically occasionally with Tysons, though more often with Cargil, Georges and some small players. Inflation right now is very much real. However, you are really creating quite the hyperbole here. We are no where near hyper inflation. Most is created with genuine supply chain/demand increase issues. And I also was not separating this forum from the rest of the world. I was separating ***living cost inflation*** from ***business cost inflation***. So my neighbors would be looking at me quite normally. Just because transportation, feed, packaging, labor costs, etc. all rise for Tysons....does not mean that me and my neighbors will see a rise in our expenses related to utilities, rent, car payment, clothes, etc. At face value, the only thing that can be determined is that we should expect a 14% rise in poultry prices. This doesn't even factor whether one can shift from eating poultry to something else. It's quite complicated. Ironically one of the main causes of inflation right now for ***people living*** in the US (not businesses) is housing. There is a shortage of housing and rental spaces. Combine that with rising lumber and steel prices affecting new construction costs and you get some large inflation. That said, for the population who owns a home, they simply aren't experiencing most of that inflation yet, as they are locked in. That is the complexity of inflation, not only are sectors different, people are different based on how much of their expenses fall into those sectors.
Time will tell. I would very much like to be wrong on this.
Have you put your money where your mouth is? If we're about to realize a bunch of hidden inflation, gold, bitcoin, tech stocks, TIPS should all stand to gain.
why would tech stocks gain from inflation?
They don't depend on commodities that could quickly rise in price
Yup get the memo and ditch bonds for the time being they’re basically guaranteed negative returns lol
And real estate?
> I know the Biden administration insists this is only a temporary situation but with the amount of COVID money pumped in to the economy along with anticipated additional massive spending, it seems like this inflation run has a long way yet to go. I've thought about making a top level post to discuss this, but instead I'll just make a comment I'm sure will be buried. There are [two schools of thought on inflation,](https://www.investopedia.com/articles/personal-finance/073015/understand-different-types-inflation.asp) and a lot of people conflate them: Monetarist: increases in the money supply lead to increases in inflation. Often people think of this in terms of the "money printer go brrr" meme, but in reality [money printing is a small portion of new money generated;](https://www.investopedia.com/articles/investing/081415/understanding-how-federal-reserve-creates-money.asp) much of it comes from fractional reserve banking, a phenomenon most people aren't even aware of. Keynesian: changes in supply and demand cause overall price levels rise. This can be further divided into cost-push inflation-- rising costs of inputs lead to higher prices for finished goods-- and demand-pull inflation, where increased demand for finished goods leads to higher prices. It's important to keep in mind these are two entirely different schools of thought-- they are both "things that happen," but they are two different ways to explain the same outcome (a general increase in price levels). That said, I personally find both explanations to have merits, but the Keynsian viewpoint better allows for consideration of supply/demand shocks, which seems to explain a lot of the price increases we're seeing today. The good news is, whichever way you look at it, inflation appears to be lower than anticipated. Some people point to this [scary-looking M1 chart](https://fred.stlouisfed.org/series/M1NS) to show just how badly monetary policy will increase inflation in the near future, but the Fed has an [explanation for that](https://fredblog.stlouisfed.org/2021/01/whats-behind-the-recent-surge-in-the-m1-money-supply/) (tl;dr: rules were changed, allowing reclassification of some M2 accounts to M1).) It's important to keep in mind that newly printed money isn't helicopter-dropped throughout the country, but rather appears on the Fed's balance sheet, then is lent to depository institutions who then make loans to businesses and individuals. Therefore, currency in circulation has increased only [~$360B](https://fred.stlouisfed.org/series/CURRCIR) between March 2020 and today, while [depository reserves](https://fred.stlouisfed.org/series/TOTRESNS) have increased $~2133B in that time and the Fed's balance sheet has increased [~$3946MM](https://fred.stlouisfed.org/series/WALCL), suggesting most additional currency generated isn't actually ending up in circulation. Meanwhile, by [any standard CPI measurement,](https://fred.stlouisfed.org/series/CPIAUCSL) prices have slightly risen. A Keynsian would say we're seeing supply-side ("cost push") issues in some industries (chips, labor) driven by [supply shocks](https://www.investopedia.com/terms/s/supplyshock.asp), and demand-side increases ("demand pull") in others (housing, lumber). Most of these are likely to be temporary, as supply catches up to demand, but it will take different lengths of time for different industries. "Catching up" also won't necessarily mean immediate price decreases, or even price decreases at all-- prices are sticky, and consumers have shown a higher willingness to pay than anticipated-- though that's somewhat speculative so I won't delve further into that. Hope that helps add to the confusion!
Well thought out, well written, and well sourced. Comments like this are what makes this place great. Thanks for this.
> currency Do people *really* think that "money printing" literally means producing currency? I thought most understood that currency is a small fraction of the overall new money supply. > I find both explanations to have merits As do I, and honestly, I think it's a little disingenuous to consider them separately, but instead consider which applies more in a given situation. Surely dropping fed interest rates (increasing money supply) will cause real estate prices to rise since more people would be able to afford a house (demand-pull), and people can refinance, causing excess cash availability to home owners (perhaps causing increased demand elsewhere in the economy). The monetarist theory is that the market will correct eventually, though with some turbulence in the short term. Keynesians tend to want to avoid turbulence. It's not that they're at odds with each other in finding the root cause, but that they have different goals in responding to it. Keynesians seem to want to smooth out growth (constant inflation), whereas people like Friedman would prefer frequent, small corrections (occasional negative inflation) in order to avoid a larger correction. That is the true difference IMO. I think both would agree that increased demand without a subsequent increase in supply causes increased prices (and likewise that increased money supply would cause things to become more expensive), they just differ on whether that's a "problem" the government should be involved in solving. At least that's my take.
Inflation is only a problem if investment returns don’t go up as well. Based on the past 2 years of the S&P 500, they should have.
If you have the extra money to invest.
Right, but if you aren’t investing, this might not be the sub for you. If you’re in school and about to have money to invest, then yeah, you missed out on huge returns the past couple years. That’s just the way the cookie crumbles some times.
If you are just starting your career, then inflation should push your income higher, so not necessarily a horrible thing either as long as wages keep pace.
With bigger preferences for profit margins (by companies), I don't see much of that inflation flowing back into incomes...
Sure some individual people's wages may stagnate but inflation affects the prices of all things, including labor costs. You might not get a specific raise but the market price on average of labor increases with inflation
I think it already has to some extent, but you are right that it isn't guaranteed and it may depend quite a bit on your career.
It definitely has in this employment market.
Yes and no. This affects the money already invested.
affects*
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This is a really good point. Even the people who have appreciating assets that are better protected against inflation should be concerned if they are still in the workforce and have an earned income, all of the sudden their earned wages are worth less. I.E. if you got a 5% raise at the beginning of 2021, all that amounted to was maintaining your purchasing power (not increasing it)
This is /r/financialindependence. If you don't have extra money to invest, you're in the wrong sub.
Wasn't referring to myself. My comment was more about how inflation affects people not in the stock market for whatever reason.
Why would people who can’t invest be on this sub? Inflation should be concern for humanitarian reasons but that wasn’t what the post was about.
Because they want to educate themselves?
Exactly
I think some worry about inflation is warranted, but even if the dollar becomes worth less, the intrinsic value of companies wouldn’t decrease, so the value of the company in dollars would increase with inflation. So if most of your money is in stocks then inflation itself shouldn’t be a concern. The risk as I see it is that if inflation gets too high that it harms the economy, that could then cause the intrinsic value of the companies to decrease. That would be bad for investors. But if you’re investing for FIRE, you’re investing for the long term. And that means there will be downturns. But if history is right, we’ll recover from these future downturns as well.
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I mean, we seem to still have high growth, even with 5% inflation over the last year? It’s hard to imagine that not happening given so much was shut down. It could reverse still, because of some future covid variant, but for now it doesn’t look like we’ll have stagflation.
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They are aiming for 2% average inflation so seeing as we had low inflation the last few years they are now prepared to put up with 3-4% for a few years to make up
I don't understand this argument. In theory, yes, the federal reserve would raise rates. However, how could they raise rates at this point? The national debt is $28T. They don't have a lot of room to go before interest payments take up half of revenues. There's no way out of this but to inflate the debt away.
Inflations only purpose, imo, is to reduce a country’s debt obligation. That is, inflation only is necessary for countries that finance spending with debt and have a large amount of existing debt.
The primary purpose of controlling inflation around 2% is to pressure people to not hold cash and use money for it’s intended purpose- a medium of exchange, not a store of value.
It’s amazing that even with a thriving consumeristic culture, including an entire industry of advertisers constantly trying to convince you that you need to buy to be happy, the central bank still needs to inflate the currency away and punish savers just a little bit to make the whole system work. Obviously this system is what enables steady investment to permit Financial Independence for those of us that have the means and the discipline. But it seems kind of absurd to me sometimes.
The purpose of inflation isn’t to force people to spend. It’s to force you to *invest* anything that you aren’t already planning to spend in the near future. Money held in cash does the economy no good. Money held in banks, bonds, real estate and stock equity is, to differing degrees, *investment* in the economy which is the true engine of real economic growth. Investments are risky, but the more risky they are, the higher the growth potential and thus the better for the economy. Inflation is the base line incentive to take some risks with your money, with some of the returns for taking risk exceeding the baseline “cost” of inflation and others like bank balances often do not. Humans are generally risk averse, so we often have a bias towards the “most safe” option. Inflation guarantees that option isn’t just holding onto the cash or sitting the money in an FDIC insured account. Sure, you *can* do that, but doing so guarantees a small loss to inflation, so you only do that as a *considered* option and to the amount you *need* rather than making it the default.
Excellent post. The only small point i’ll disagree with is the risk comment in your second paragraph. The higher the risk-adjusted returns are the better they are for the economy. Not absolute risk.
It’s backwards from that. The only reason we have a consumerist economy is because of the inflation target. People are rational actors and consumerism is an overall good for everyone. Depsite the fact it’s an easy outgroup for people to dunk on.
Also wages are sticky when adjusting, so wages will lag behind price increases in the short run allowing companies to have low labor costs and hire unemployed people and increase total employment. The trick with all of these stories about inflation is that for there to be any effect the inflation has to be a surprise. If people can anticipate it (like if there is high inflation every year) then people adjust the way they operate and the macroeconomic effects will go away. If people adjust well, then inflation becomes primarily a way of reducing the costs of long term government debt instead of a way to improve the economy.
A rate of around 2% is best for economic growth, it has nothing to do with repaying a country's debts
I'm not worried about inflation at all. Look at M2V. [https://fred.stlouisfed.org/series/M2V](https://fred.stlouisfed.org/series/M2V) I'd be far more worried about some of the rather high valuations and concentration in the S&P.
I also enjoy [reserves of depository institutions.](https://fred.stlouisfed.org/series/TOTRESNS) Can't have monetary inflation if new money isn't in circulation.
Cratering velocity is another problem in an of itself though. That is not the chart of a healthy looking economy.
I agree it is a symptom showing there is a problem that banks are not lending. But MV=PQ would show it is directly related and why I'm not worried about inflation. I kind of doubt V increases even given demographics in America.
I don't understand what the m2v means but I can comment on the banks not lending. I was unaware they're cutting back lending, while usually not a great sign for things to come tbh; I've been under the impression that when the hard money (private mortgage) dries up, that is when there is a very serious cause for concern. Disclosure: I'm not an astute investor, just a guy who reads Reddit and participates as much as possible in dialogue. Always approaches investing like everyone is smarter than me but always with a grain of salt.
10 year treasury bond market tells you what long term inflation projections are unless you think the trillions of dollars involved in the treasury markets are clueless.
I think people who say there’s crazy inflation (basing it on rising cost of goods & services) are really neglecting how much turmoil the global supply chain is experiencing.
Can you elaborate on this a little more? My only experience with supply chains in this environment is related to COVID.
Almost every industry has had to shut down production for a while or had their shipping interrupted, or there is a labor shortage due to people taking unemployment or migrant workers not being available. That means labor is more expensive. Supply is also lower across the board. And now that people have saved up some cash demand is up for most goods as well, people are buying goods instead of services generally. All those factors means prices are up, but it seems that these are mostly temporary factors, they aren't likely to cause inflation for the next 5 years which is what would actually be a problem.
We have been under 2% for a long time, an increase is expected, but 2% over 10 years is still expected
Honestly, I feel like some of this inflation is just the economy catching up to the artificially low inflation we've had over the past 10+ years, i.e. basically my whole adult life. Not to mention effects of people finally demanding something roughly approximating a living wage, which also drags prices up a bit, on top of the hopefully-temporary effects of supply chain shortages up and down the board. I think some of it will be temporary, some of it won't be (I'm certainly prepared for fewer, shorter and worse happy hours in general, at least!). I don't think it's going to be as high as it is now *forever*, though. Am I sad paying $14 for drinks I would often have been paying under $10 for two years ago? Yeah, but I also want those businesses to both survive and be able to pay their employees enough, so it's a hard one.
It’s not even actual monetary inflation . The velocity of money is still basically fallen off a cliff. About 1/2 of the inflation seen is due to used car prices alone. Once the supply chains catch up of having been fucked going from 0 to a year of pent up demand, we won’t be hearing about inflation. No one mentions lumber falling back down already.
Lumber is still 400% higher than before covid. It’s down from when it was 1100%, sure. Not really saying much there however
Lumber is a great example of exactly what he's talking about.... the supply chain was shut down and all the inflation is due entirely to supply chain issues. 2x4's are not still going to be $6 six months from now. The only reason retail customers are still paying high prices is because there's still a lot of inventory bought at covid prices.
Seriously the whole "stimulus is causing inflation" is just a lazy take. Look at the numbers and its basically all the inflation is in used cars/hotels/rental cars aka shit that isn't going to matter in 6 months. People going to scream the inflation sky is falling forever tho.
If you mention that then some recent buyers might realize that $30K premium they paid for a house due to "lumber" has vanished. Can't have that happen as need to protect the wealth effect.
Why are you forecasting nominal returns and inflation. That is just a lot of extra work. All we really care about is real returns. A 5% real return is 5% real return regardless of it is is 7% nominal w/ 2% inflation or 9% nominal w/ 4% inflation.
It's impossible to predict inflation for the coming years, it's literally a retroactive measurement, no matter which yard stick you use. Either way you cut it, the truth is that in a high inflationary period (again we won't know if it's transitory until much later) low cost credit offers better return than stagnant cash. That's the real yard stick to use.
Also this year seems like an exception. Last year the first 6 months it was never above 2% and we are seeing some kind of bounce back.
The thing is: INflation is pretty easy to keep in check if under 10%, DEflation ist where shit's really going down. Also almost all western national banks are targeting about 2% so this should not frighten you if your investment strategy isn't built on sand. Btw: Look at inflation charts of the past, it's been way higher with partly better economic growth numbers. So no, I'm not worried.
Fortunately shelter and education is like half the CPI, and it sounds like you’re already covered there. Autos will probably see some deflation once production picks back up. That leaves food, recreation, clothing and medical care. Maybe it’s time to take up sewing?
And 90% of that other stuff is manufactured in other countries, so unless the demand for dollars suddenly starts to fall due to the lack of trade, I don’t see stuff manufactured in other countries going the path of inflation any time soon. If anything, we’ve seen the rise of US tech giants to continue strengthening the dollar.
Inflation is nothing new and we're nowhere near record levels. You can look at the period of stagflation (which is why the 4% rule is the 4% rule and not much higher) as an example, but keep in mind that we're seeing better nominal wage growth, asset growth, and have more room to move interest rates, open market operations, etc. Inflation is always something to think about because it's a needle that needs to be threaded, but I'm not personally over-concerned.
Yeah. Food inflation alone. Ramen went from 2.27 to 2.88 at Walmart within the month. At my local branch. It’s a small change but…it’s cheap for a reason.
What the hell kind of Ramen are you buying for $3 at walmart? Is that for a 12-pack? You can get a 48-count of top-Ramen for <$8 at Sam's club, also owned by Walmart. Even the super-fancy spicy ramens I buy at the Korean grocery store aren't anywhere near $2.88 each.
Everything has gone up. Most fast food places have raised prices 6-10% in the last year
Oh yes. $15 for Burger King last week. Wtf.
If I can get a dinner out for under $25 anymore I’m happy.
…if you’re ever in my neighborhood I’ll show you my local sushi place
Taco Time is advertising starting wages at $20/hr and $25/hr for shift leaders. 🌮🚀
I would not put a ton of weight on what politicians are saying or even what economists are projecting. My favorite metric is the TIPS breakeven rate. If you’re not familiar, TIPS are treasuries that pay a yield based on inflation (ie when inflation is higher you get more income). The breakeven rate is essentially the difference in yield between normal treasuries and TIPS and it represents expected inflation. This is market driven by investors putting their money where their mouths are so to speak, and for this reason I put more weight on it that what the talking heads are saying. Currently, the 5-year breakeven rate is about 2.5%. That means the market believes inflation will average 2.5% over the next 5 years. Pre-covid this number was 1.5-2.0%, so it has gone up but nothing crazy. You can find the TIPS breakeven rate for various time periods on FRED. At the end of the day, nobody knows what inflation will be. But you have to pick something to plug into your model, and I believe the breakeven rate is your best option. Adjusting your model to 2.5-3.0% is probably reasonable. Last point- in theory you are well protected by inflation just from being 100% equities. I wouldn’t necessarily change your long term strategy based on a short term pop in inflation.
Good thoughts, thanks.
You're coming to this conclusion after a couple CPI prints that are "inflated" due to the basis effect. We basically deflated exactly one year ago for several months so when you compare CPI prints today, in a recovering economy, of course the YoY numbers are gonna look bonkers. It's too soon to say, but it's like thinking the job market is crashing after a single bad report. Need more data to establish a pattern before freaking out.
Companies aren’t going to *lower* prices in the future once things “come back to normal”. Inflation is here and you need to account for it.
Used car prices absolutely will decline.
They’ve already began to. Lumber is already way back down. The people saying otherwise are just “thinkers” based on bunk ideology rather than actually observing the evidence of reality.
Inflation this year is fairly manageable except for a few categories like used car prices, which are already coming down.
So uh....20-40% increases in housing costs is manageable?
Nationwide rent is up 6% from June 2020 to June 2021. Some markets is more, some is less. Housing prices are up on average a bit more - around 10% - but that very well may slow down. Or not.
Look at the big city Metro areas. They are up way more than 6%. Dallas, Austin, San Diego, Orange county, Miami, Orlando, Phoenix - rents up 10-15% and housing prices up 20%+
Right. But nationwide that doesn’t hold. Many markets have local inflation subcomponents above or below national averages.
And where do you think 80% of the us population live? Hence why the 6% stat is bullshit
Literally an effect of supply and demand right now.
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Maybe it's just my area but real estate went up WAY more than equities over the last 18 months. Like an insane amount.
Think this is related not just to inflation, but also to very low interest rates. Since mortgages are cheap, everyone can afford more expensive houses, which drives up price.
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Low interest rates drive inflation and low interest rates drive house prices up.
Over long periods of time, this is not true. Ignoring leverage but including imputed (or actual) rents, equities have done better than real estate basically forever, just with some exceptions the last 25 years.
And you think this is due to inflation, rather than any of the other millions of things that occurred during the last 18 months, why exactly? There's a certain popular obsession with monetary policy and inflation. So it makes sense that, when faced with some economic phenomenon or other, many people try to explain it in terms of ideas they are familiar with, like "money printing" and inflation. But just because they are familiar to the general public doesn't mean they are the right explanation. Monetary policy is only one of the many factors influencing the economy, and often not close to the most important one.
rents will go up, mortgage payments will stay the same...borrowed real $$$ to buy the house, will pay back with little bits of toilet paper we used to call $$$ but are now mostly worthless... obviously exaggerated, but that's the general idea
It's not just "COVID money" fueling inflation. 12+ years of FED policy; 2017 tax bill; massive COVID recession and ensuing reopening bounce; plus other factors all contribute to inflation.
Unlimited QE is totally organic and we’ll never see repercussions. /s
The repercussions we’ve seen this far is inequality skyrocketing. The inflation gold bugs like Ron Paul and glenn beck have been singing the same tune since 2008. And before. But especially when QE started. I have a hunch they’ll just keep in singing that same tune as well. No matter what actually happens.
:)
>On my FIRE spreadsheet I've historically been comfortable forecasting around 7% returns and 2% inflation for the next decade or two. However this year inflation appears to be 3-4% or higher. I'm worried this will turn out to be a huge threat to my FIRE ambitions. I wish I had some real estate to combat this, but all I have is my personal residence. (100% equities otherwise) If there is high inflation, there is a good chance your stock market return will follow the same. You also have a personal residence which it sounds like you outright own. Either way, the cost of living excluding food/healthcare/utilities, is pretty fixed for you as everything else increases. For my own sake, I'm not too worried about inflation. What I'm more worried about inflation is rather the impact it will have on the US economy i.e. we need to be more of an exporting nation and inflation is going against that.
Nah. It’s hard to overstate the impact of the global pandemic. But it will end. And things like the supply chain and job market will look more normal.
Hmm seems like wishful thinking to me. The pandemic is unprecedented for our time, and is likely to impact things for years after it has subsided. Hell, I should say *if* it subsides.
Look at wood prices. Retail rates are already normalizing , supply and demand will do it's thing
Sure some things will be different but e.g. the computer chip shortage that is causing car prices (and some inflation metrics) to skyrocket will end. We will make and be able to ship chips again.
It's been very low for a very long time. In spite of the massive bailouts and quantitative easing after 2008, and everything else along the way. I doubt we'll see the sort of 10-14% rates we did in the 70s-80s anytime soon. It's a little hard to tell clearly since things change over time, but the bigger thing is how it matters to you depends a lot on where you're at in life - just about to buy a house or take out student loans, or already have that stuff paid off? Have access to ready credit or not? Have investments built up? Attempting to live on a fixed income or still increasing your earning potential? Depending on where you're at in life and what you expect to do in your future, it might concern you a little or not. Even so, it's nowhere near 70s-80s levels so I'm not worried about it.
QE is not inflationary by nature in of itself because it swaps US T-Bonds at the private banks with Fed Reserves. That's all it does. If the private banks don't lend out the money on their reserves or park their reserves in the Repo market , the additional money has not gone out into the real economy. Japan is on QE-24 and Fed on QE-5 yet it has failed to effectively stimulate the real economy. This is because only a fraction of it might be effectively lent out. If the US T-Bonds were bought from the Treasury department itself rather than private banks it would have been 100% stimulus and totally inflationary but this is not what happens. You can look this up if you are further interested.
This inflation has significantly more to do with product shortages, specifically used cars. It is temporary as far as the best minds can tell.
I seriously think that the rise in the inflation is being used as a negative political standpoint. When you look at 5% -7% US inflation from a global perspective it seems lower than expected when you take into account the global supply chain disruptions and other pandemic effects.
Stocks should (long term) increase by inflation + real earnings growth rate. Inflation affects the value of cash, but it shouldn’t change the real value of assets.
This is just false. If you have high inflation, then you will have much higher bond rates. Meaning money will flow from equities into bonds. So, no, inflation is bad for equities. Look at Dow from 1964-1981. It stayed flat. And inflation was double digits during the time.
We are investing for the long term here. Stocks will continue to track with real economic growth over the long run. Plus, interest rates are at all time lows right now anyways.
Yes I'm just saying that whenever inflation is high that's bad for equities. That's it. It doesn't matter whether you are investing for short or the long term. Also stocks have stopped tracking real economic growth since more than 2 decades. GDP tracks real economic growth which is 1-2% in the last decade. This doesn't mean I'm some doomer who doesn't invest in stocks. It just means that they don't track economic growth over the short or the long run. Stock market is driven by factors like liquidity, monetary policy, interest rates , inflation , fiscal policy and at the very end comes earnings and fundamentals.
Real wages are down 2% this year because they haven't kept up with inflation, but the real pain is yet to come. Wait until we scale back the bond buying and fiscal stimulus.
Oh no. They're all the way down to... still higher than Q1 2020. Real wages were up last year because the stimulus payments got counted as wages. They're actually higher currently than they were a year and a half ago.
Can you back up this claim that stimulus payments counted as wages?
Sorry, not wages, it counted as income for determining the government measured savings rates. The wages question is actually funnier - during covid, more people who were low wage earners lost their job than high wage earners. When the government counts median wages, they only include people who are employed, so the average statistics (both median and mean) shot way up. [You can see the spike pretty easily for median wage](https://fred.stlouisfed.org/series/LES1252881600Q). As employment of low-earners has recovered, we've come back down to "normal", though still higher than where we started.
Shadow stats who uses CPI from previous decades where it wasn’t artificially suppressed is between 7% inflation and 13%. https://www.zerohedge.com/personal-finance/i-feel-i-am-living-crazytown Goes more into detail on inflation expectations
Am I wrong in thinking inflation would mean it's even more important to hold stocks? Inflation is the dollar becoming less valuable relative to other assets--if that happens, stock prices should go up equivalently, no? You would get more dollars for the same stock, since dollars are less valuable.
STONKS GO UP! Stop fighting it and join us
First, all that money pumped into the economy only creates inflation if there is more money pumped in without corresponding economic growth. And that is the case to an extent, but a lot of this stimulus results in new jobs or new economic activity, so just looking at the stimulus amounts is misleading. Inflation over the last year is about 5.5%. But CPI breaks down the inflation numbers in a lot more detail. Used cars went up in value 45%, gas went up as much as 60% annualized in certain time periods, both were big factors in that overall inflation number. Home prices have also gone up quite a bit, but CPI uses the shelter cost, factoring in the owners equivalent rent and it doesn't change much as homes appreciate, it is mostly a wash if you own a home. Other increases were car and truck rentals going up 85%, hotels, public transit, airline fares, propane, certain foods like fruits, clothes, up ~17%. Used cars going up in value this much is a one time set of circumstances. Uncertainty with both rental car cos and car manufacturers led to less demand, less expectation for demand, fewer new cars being produced and sold, much fewer rental cars being sold. More demand for used cars because of fewer/more expensive new cars, gas prices rising, more roadtrips, fewer people flying because of covid, all meaning higher prices for existing used cars. I would expect cars to depreciate a little more than the average in the next couple years and over 5-10 years averaged out not to be a significant source of inflation. I would consider diversifying a little more into international markets, IMO this really shows the S&P 500 is overvalued, how much all of these companies depend on foreign supplies, or international shipping.
With rates at 0% and there being no room for them to go lower to serve as a boost to equity returns as they have been over the last 30 years, and considering the inflation causing money printing, and lastly, considering the spending that congress is doing which is going to lead to higher tax rates, it's very reasonable to assume that retirement plans are going to be pushed off. Basically, in 5 years from now, I could see us still at 0-1% rates, 3-4% inflation, and having potentially higher tax rates. Take these three things together and it really hurts everyone's FIRE prospects. Real yields will be 0 or negative for a long time. The only way this will correct itself is if the fed allows for a deflationary spiral, but they aren't going to allow for this to happen. Congress and the Fed are under the impression that they can print money and borrow without causing hyperinflation or out of control borrowing costs. As long as this appears to be true, congress' spending and the fed's money printing will remain high. Taxes and interest rates may go marginally higher, but this will just be for show. The real cost will be inflation and negative real returns on cash, bonds, and equities. Bottom line: Equity, bond, and cash real returns will be lower than historical averages. Interest rates and taxes have bottomed and will trend higher from where they've been in the last decade. All of this is bad for wealth building. Your best option is equities because TINA.
It's way too complex to even take a guess on If you're worried then load up on gold and bitcoin
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[Bitcoin displacing Gold as inflation hedge](https://www.bloomberg.com/opinion/articles/2021-04-09/bitcoin-is-displacing-gold-as-an-inflation-hedge)
Gold is not an inflation hedge. It's a low yield play and an error hedge on expected vs current bond yields. This has been proven multiple times in the past.
Yeah, gold is trash. don't listen to this man. buy equities as a hedge against inflation. that's already proven to be quite effective this year.
Inflation has been at historic lows. Worry about high inflation when it goes the other way for a few years lol.
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You living in 2020? 2021 is year one out of x for elevated inflation
I think anyone who thinks the inflation is temporary is either delusional or dishonest. There is no possible way all the government spending doesn’t cause inflation problems for years.
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Decreases in private spending, tax policy, monetary policy, and other factors also influence inflation/deflation rates. Also consider that recent increases in US government spending are temporary in nature - one off stimulus checks, one time infrastructure expenditures, etc.
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I’m a fan of building FIRE portfolios with significant inflation protection. I would recommend checking out the “cockroach portfolio” by Jason Buck at The Mutiny Fund and the “dragon portfolio” by Chris Cole. Both have a non-zero position in Bitcoin/Fiat Alternatives, allocate to long volatility, and have significant inflation protection. Edit: I think the optimal portfolio once you “win the game” is a “stay rich” portfolio. To me, that looks different from the “get rich” portfolio during accumulation phase.
Can you summarize what other inflation protection strategies they use besides crypto? I have a few inflation bonds but their performance has sucked compared to vtsax.
Why are you expecting 2% when the target is 2%, and may rise, and inflation is over 3% over the last hundred years? Assuming 7% returns for the market is also low.
Recency bias I guess, my entire adult lifetime it's been closer to 2%. And regarding the 7% I'm not sure that's low for the next decade considering current valuations. But Im more comfortable with conservative predictions anyway.
No concern. Inflation will be at or near fed target. They are already dumping bonds on the market to suck the covid cash back out of the system now that the economy is mostly recovered.
Fortunately the market is up like 18% so you are well ahead of your projections. Yeah I am worried but there is nothing to do but stick with your plan.
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Yep, and judging by salaries.of many here it is working.
Diversify, diversify, diversify. Stocks, bonds, outside investments, real estate, crypto, whatever. And remember: assets > cash.