Inflation is the rise of prices over time and reduces the buying power of currency. For example, a single-family U.S. home in 1934 cost an average of $5,972. In 2016, the average single-family home cost $233,900 according to the National Association of Realtors. Of course, inflation has run at different levels throughout history and the average U.S. inflation rate is 3.22 percent since our government began tracking it in 1913.
Inflation also runs at differing levels in different industries and services. Healthcare, for example, runs at a higher, long-term inflation rate of 5.4 percent.
Inflation has a large impact in retirement because people are living longer. The U.S. national average retirement age is a very young 63. The average life expectancy of a 63 year-old male is 82 and for a 63 year-old female, it is 85. However, keep in mind that this is the average life expectancy, so half that population lives longer. On average, retirees live 20 years in retirement but half live longer. When people plan, it is important to be realistic about how long their resources need to last. A person who retired in January 1997 on $40,000 will now need $61,053.17 to maintain their same living standards, according to the U.S. Bureau of Labor Statistics CPI Inflation Calculator. In addition, retirees tend to use services with higher rates of inflation more than younger workers do. As noted above, health care inflation runs over 2 percent higher than average and is typically used more as we age.
Inflation is most damaging to retirees at the beginning of retirement, as it can quickly eat away at savings. The good news for retirees is that the world is in a low inflationary environment. The main drivers for the continuing low inflation are commodity oversupply and technology.
Commodities took a dive due to increased supply and decreased demand. As China moves from an emerging, manufacturing society to a more developed service economy, their need for commodities dwindles. New technologies in energy production led to an oversupply in oil, which lowers many production costs.
Technology has helped tame inflation in many ways. It reduces costs through automation and increases productivity. When we started managing accounts, we used a DOS-based system and the reports took hours to run. Currently, we have PowerAdvisor portfolio management software based in the cloud and most reports take a matter of minutes. In the old system, we could never have handled the level of assets and clients that we have now.
Milk, bacon and everyday staples continue to increase in prices keeping CPI growing annually. Did you ever notice the increasing price of a box of cereal versus its ever-shrinking contents?
Now consider the price of computers and laptops. From 1993 to 2003, the computer price index dropped 20 percent. The computer power that used to take up a whole room now sits in our hands via an iPhone or Samsung Galaxy. Laptops are now shockingly inexpensive.
What about the changes in commerce? The behemoth Amazon allows for purchases of groceries, beauty products and pretty much anything you could want. Do a search and it’s on sale there. You need toilet paper? No need to run to Giant or Weis, just log in to your Amazon account and it will be at your house in two days with Prime. You don’t need to drive, checkout with a cashier or fight lines. Netflix permits instant access to movies and TV shows. The idea of running to Blockbuster to pick up a VCR tape and making sure you rewind it before you return it now seems ludicrous. Facebook allows people to share their every moment or event. It also mines data from their 1.59 billion monthly active users for research, retailers and others. Uber and Zipcars are alternatives to taxis and car ownership. These are all ways that technology is changing the way we do business and revolutionizing the economy. CPI, the U.S. government’s way to track price data, was made to follow commodities that turn into widgets. Because it doesn’t translate to a widget count, the CPI cannot track the commerce that is social media.
Inflation is also lessened as technology adds to efficiencies, lowers the need for blue collar workers, and begins to tackle white collar jobs. In the future, driverless cars are expected and artificial intelligence continues to advance. The mystery — for now — is how this will continue to affect inflation and whether, finally, inflation might permanently be made a thing of the past.
Nothing contained in this article should be interpreted as a promise or guarantee of earnings or investment results nor a recommendation for the purchase or sale of any security or sector.