The commonly used rate of inflation, 3%-4%, is used in so many formulas for retirement, investing, and “cost-of-living” increases. But, is that the right number? A recent news story released by the American Institute for Economic Research claims that the real rate of inflation is closer to 8%.
I won’t pretend to understand all of the economic talk in that article. What I do understand is that they are claiming to be using numbers that are more reflective of the average American’s spending habits. More importantly, if their research is even partially correct, it means that the rate of inflation could be significantly higher for some parts of the populace. Not only does this affect the available funds for saving and spending, it could affect the numbers that many people are using for estimated retirement needs.
The research is still fairly new, as it doesn’t appear that they have that much historical data to back up their claims. But, they do present a strong argument for a change in what we assume inflation to be, and where we get that information from.
How would a 8% inflation rate affect your finances?
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The government statistics on inflation has become political, calling food and gas commodities. They leave these numbers out and then inflation is modest. Oil/gas has increased over the last year where it is affecting everything we buy. Inflation is here, but the government is denying it for political reasons.
I see my spending power eroded thanks to inflation. The only saving grace is my investments are growing faster for now.
There are three kinds of lies, damned lies and statistics
Benjamin Disraeli
Inflation is a tough one as its very hard to measure accurately, for example all the money in the world would not have enabled you to buy an ipad in 1980…
However, there it at very least a popular belief that inflation tends to be underreported… Over the years even a slight underrporting will have significant affects on your portfolio and savings.
There are many people on both sides of the fence when it comes to whether you should buy or rent a home. One thing to consider in favor of buying is that you lock in the majority of your monthly payment, which then remains the same regardless of inflation. Yes, your taxes, insurance, and maintenence costs will increase but your base payment will remain constant, representing a smaller and smaller portion of your overall expenses over time, whereas your rent payment, which might start off lower, will likely cross over and become more expensive as inflation persists.
Inflation has outpaced wage growth for more than a decade, this is a major concern for the middle class. Quality of life is inching away each year.
@Krant I completely agree. Inflation, like so much else, has become a political tool, used to further aspirations.
@thewealthyicelander Yeah, I don’t think that all the tweaking in the world will truly give each of us an accurate inflation number. Depending on spending habits, and such, each of us has a unique number.
@moneybeagle I think it also depends on the home market where you are too. Here, the market has been pretty much stable for years. Elsewhere, you would have probably been smarter to rent for the last few years.
@hunter Part of the problem is directly related to the number that we’ve been giving to inflation being inaccurate. If your annual cost of living increase is tied to inflation, would it be different if inflation were pegged at 8% instead of 3%?
Inflation is interesting. Fuel price increases are a huge driver, but as others mentioned costs have outpaces wage growth for quite some time. The only way I trust measuring inflation is with the “basket of goods” measurement where you compare the same staples over time. However, it is also important to include the grocery shrink ray in your calculations.
It has not impacted me a lot in a meaningful way, but I could see it impacting families a lot more.