Today, we turn our attention to a particularly timely topic that afflicts us all, an omnipresent factor in our lives that we not only can’t see and have little control over, but has also caused many a historical episode of panic marked by frenzied spending and hoarding of goods.
We are talking about, of course, inflation.
Inflation, economically speaking, is an increase in the general price of goods and services over time. From one year to the next, inflation is often barely noticeable. Our household budgie this year is about the same as it was last year, if not a bit lower since HALLELUJAH MY YOUNGEST IS IN KINDERGARTEN1.
Over, say, 60 or 70 years, though, inflation becomes much more apparent.
If there’s anything the last two weeks have taught me, it’s that I desperately want to keep doing the things I want to do (husband: I knew that before). I want to go to the gym! Go to a cafe! Go to Paris! I want to do these things this year and in 20 years. And if I want to do these things in 20 years, I can’t not think about inflation.
To illustrate, I give you Exhibit A, a menu hanging from the wall of local institution Mickies Dairy Bar here in Madison showing the eatery’s prices from the 1950s:
Neat, huh? I showed this to my daughter and her first question was, Are those dollars?!?
Umm, no. French toast? 50 cents. And it comes with coffee! I was only a teeny bit proud when she matter-of-factly replied that the prices were more acceptable then since they were in line with what it cost to make said meal at home.
Still, I am sure the prices were also quite acceptable to, say, an 18 year-old college kid in 1956—let’s call him Walter—stopping by the greasy spoon before the big game. After all, young Walter makes a dollar an hour2 at his part-time job in town and danggumit, if he hasn’t earned his stack of two wheat cakes and a side of bacon!
A child of the Depression, Walter makes sure to live beneath his means—no ham today!—and even has some money tucked away in the bank for The Future. He’s just made in the shade, Daddy-o (note to self: no one is impressed with your ability to google “1950s slang”)!
But let’s say The Future comes a bit more quickly for Walter when he [insert favorite time travel mechanism] and finds himself suddenly plunked down in the same college town only now it’s April … April 2020. Luckily, the first person he meets is me.
Welcome, time travel guy! You made a great choice with your destination. As you can see, we’ve relaxed the dress code a bit. Still, it’s a beautiful, sunny day, birds are chirping, and my kids are busy filming a family documentary called Lord of the Flies. Let’s walk to the grocery store and get some essentials (i.e. alcohol)!
I think you see where this is going. Walter might indeed be a diligent saver, but as we peruse the shelves, I can see his growing alarm at the sticker prices. $2.50 for a dozen eggs? $4.95 for a box of cereal? $10.00 for a six-pack of beer??!? Walter looks ill. His dollar an hour is not going to go very far in The Future. I don’t have the heart to show him UW tuition or the cost of healthcare.
If you were looking for a feel-good tale with a happy ending to distract you from the gloomy headlines … I am not sure why you are reading this blog good Lord have you been paying attention do you have any clue what I write about? If you needed a reminder about why we don’t just stick money under the mattress for The Future … maybe this didn’t really help, either. I know—we all have a lot on our minds these days.
The other day I was talking to a friend3 whose mom was worried about losing her retirement savings given the recent volatility in the stock and bond markets. Trust me, I get it. If you’re part of the approximately 50% of Americans who own stocks in some way, shape, or form, you probably found yourself wondering at some point recently whether it might just be better to sell it all.
Here’s the problem, though. The best way to guarantee that the value of your retirement savings will drop again and again … and again each and every year until you actually need the money is to do nothing with it. Sit on the cash. Put it in the bank and earn that 0.03%. That one hundred dollars today will be one hundred dollars tomorrow … and in 10 years … and in 20 years … at which point you’ll need a hundred and fifty dollars to do what you want to do.
So yes, I’m still working on the means part of LBYM, investing in stocks, bonds, toilet paper, Lycra, and all sorts of other things that will hopefully keep pace with (or even a little ahead of) inflation. Do I have a Plan B? Girl, have you been reading the news? I have a Plan Y. That one’s more focused on the living beneath part and involves learning to love lentils … even more. Fingers crossed things don’t come to that.
And Walter? I’m hoping he went back and started working on the cost of healthcare.
I’ve missed your posts! I had to laugh when I read your “eggs cot $2.50” line. Ha! Here in NYC, we’ve been paying $4.99 – $5.99 for a dozen eggs. Why do I live here?
Excellent topic, Grace (and one that many often under appreciate and even misinterpret sometimes). Yes!,… as you point out, maintaining or, (even better), increasing one’s future “purchasing power” is THE central point of investing. BUT….also, to comment on an often confusing twist, many people forget that some things may appear to be getting more expensive in nominal terms, but in reality are falling like a stone in terms of productivity gains (e.g. the price of an iPhone increases 15% from the previous year, but yet the processing power quadruples- thus, people are gaining far more happiness AND utility for what they paid) – So, if the net productivity gains exceed the increase in price, then it can’t really be called inflation in that instance. However, I doubt if Mickey’s Dairy Bar cuisine is 20X more nutritious today than the 1950’s??