Inflation: Friend or foe?

May 23, 2018

Seemingly lost in the chaos of the stock market volatility from a few weeks ago, a report from the Bureau of Labor Statistics that inflation, as measured by the Consumer Price Index, had risen 0.5% in January, which was higher than analyst estimates of 0.3%.  The CPI rose 2.1% over the last 12 months.

Which begs the question: Is that good? Well, it depends.

Are you still working? Inflation can help get you that raise you’ve been hoping for. Selling a house soon? Inflation can help you get a top dollar offer.

But if you are retired, that 2.1% can be a problem. It could represent a 2.1% increase in how much you spend at the grocery, or how much a tank of gas costs. It could mean you need to take 2.1% more out of your retirement accounts this year to maintain your lifestyle.

Inflation means prices are going up, which is a good thing. If we did not have confidence that prices would go up in the future, we would be incentivized to wait to spend money. Think about it: Would you spend money today if you thought you could get the item cheaper tomorrow?

The 2.1% increase in inflation last year was right in line with what we typically expect inflation to be. When putting together a retirement income plan, we often use an even higher projection of 3.4% per year. Inflation is a critical variable in long term planning, and here’s why.

At a 2% annual growth rate, money will increase by 50% in approximately 30 years. At 3.5%, it will double.

A $100,000 account would grow to $200,000 in 30 years at 3.5%. But inversely, a family spending $100,000 per year would need to spend $200,000 to maintain that lifestyle. That little bitty 1.5% difference in inflation can make an enormous difference in your life and how much money you spend.

Is that good or bad? Well, that depends on what your plan is to grow your money in retirement. Inflation can erode your purchasing power…don’t let it erode your confidence too!