Inflation is Not a Big Deal. Here’s Why.

James can trade down to a slightly used BMW and save a ton on insurance and maintenance.

Imagine a reverse savings account.  You put money into it and it will slowly erode over time at a constant rate.  Let’s say that rate is 3%.  So every year the amount you have in the account will decrease by 3%.

So you deposit $100, then at the end of the year, you’re left with $97.  If you don’t add anymore money, the following year you would lose 3% more.  You would have to keep adding money just to keep your original $100 deposit.  Doesn’t sound like a good deal.

This is inflation.  It creates an increase in the price of goods over time which erodes the buying power of your money.  The most quoted inflation rate is around 3%, which is the Consumer Price Index (CPI) provided by the Bureau of Labor Statistics.

And many of us have seen this in our lives.  A gallon of milk in 2017 doesn’t cost the same as it did in 1997.  Same goes for a gallon of gas.  I’ve even written before that the only way to beat the inflation monster is to make more money and to do it FAST.

Making more money is a surefire way to beat inflation, but it’s actually a lot easier than that.  Many of you probably have a much lower personal rate of inflation than the 3% figure.

Here’s why the idea of inflation destroying our income and retirement while we stand by helplessly is just not true.

You Are Not an Average

According to the CDC, the average weight of a male in America is 195 pounds.  Besides that being a concerning statistic since that’s already considered overweight for most males, it also doesn’t tell you much about an individual male in America.

Sure, there are males in this country who are exactly 195 pounds, but many are below that weight and many are above.  The 195 pound number is the weight of a fictional “average” right down the middle American male, which most males are not.

And even if you are 195 pounds, there are other factors that make that number even more useless such as height and athleticism.  So that 195 pound number in a vacuum means almost nothing.

I look at inflation in the same way.  While the oft quoted rate of inflation is around 3%, not everyone is affected by that number in the same way.  Prices vary widely in different parts of the country.  Inflation could be at a rate of 5% in New York while it can be 1% in Iowa.  That 3% is a countrywide average.

Inflation also affects good and services in different ways.  Computers cost a lot more 20 years ago than they did now.  Milk costs more now than it did 20 years ago.  Cars cost more now but they last a lot longer than they did before.  That 3% assumes a constant inflation rate among all types of goods, which is just not true.

An average can serve as a good benchmark, but your personal situation can make the number utterly useless.  I never liked the idea of comparing average salaries or savings rates, as everybody’s situation is unique.

You Are Flexible

Now let’s say that you are indeed this average person, and your personal rate of inflation has been increasing at a steady rate of 3%.  It doesn’t mean it has to stay this way!

One of my favorite quotes of all time is from British philosopher Alan Watts:  “You’re under no obligation to be the same person you were 5 minutes ago.”  And this applies directly to the inflation argument.

If the CPI has been showing an average rate of inflation of 3% for the country, there is not much you can do about that.  If your personal spending has been growing at a steady rate of 3% year after year, you can change that right now!  We’re not robots that need to keep spending money on the same things over and over.

There are lots of ways to do this.  We can cut out things we don’t need or just spend less on them.  We can buy less expensive versions of things we usually buy (skip Whole Foods and go to a normal store).  If you take a good look at your personal spending, you can definitely find ways to keep more of your money and reduce that inflation rate.

The fact that we can be flexible and adjust our spending to reduce our inflation rate turns traditional retirement planning on its head.  Most retirement plans and calculators automatically assume that your inflation rate will be 3%.  This can easily be changed so this means that most people can actually retire earlier than they thought.

We also may not need to save as much money as we originally thought.  This can make retirement planning seem a lot less scary and disheartening.  That being said, I’m usually pretty conservative when it comes to saving and investing.  So assuming an inflation rate of 3% is not the worst thing, because it will at least ensure that you will have enough money to reach your goals.

Conclusion

Don’t get me wrong, inflation is definitely real and it has very real effects on people’s lives.  But it’s not as big of a deal as its made out to be.  Capitalism wants people to keep consuming until the end of their days.  If you follow along, then your inflation rate will certainly be 3% or even more.

But it doesn’t have to be that way.  You can adjust your spending so you actually spend less of your money than you did in the past.  Humans are a lot more flexible than they think, and I believe everyone can find ways to make inflation a very minimal factor in their personal economy.