Inflation Is Merciless on Your Financial Future

Inflation has been low for the past 25 years and that sounds like a really good thing. In fact, the inflation rate since 1992 has remained under 3.0% annually every year with just a few exceptions when it was only slightly higher.

Inflation is often thought of as the gradual increase of prices over time. But when you're planning for retirement decades in the future, it's a huge factor. Learn more about inflation in today's post.

That’s 25 years of fairly stable overall consumer prices so you might just think all is well as we roll merrily along in our working years aiming for a great retirement. Unfortunately, if you truly believe that, you are probably not quite getting the impact that even an annually low inflation rate has on your future buying power. The fact is inflation is a merciless tyrant on your financial future.

What is inflation and how does our government calculate it?

To the average consumer, inflation can be easily defined. The standard definition is that inflation is a rise in the average price level of goods and services or a decrease in the purchasing power of the dollar. Further simplified, it means goods and services will cost the consumer more whenever inflation rises (and my bet is that it always will over time!).

The government calculates how the buying power of the dollar changes (using the latest Bureau of Labor Statistics (BLS) inflation information provided in the Consumer Price Index (CPI)) and publishes those figures every month. It compares the difference in that buying power from this year to last year and comes up with the inflation number.

The current inflation rate in the United States is 2.4% for the 12 months that ended March 2018 and published on April 11, 2018 by the U.S. Labor Department. The next update is scheduled for release on May 10, 2018 and will offer the rate of inflation over the 12 months that will end on April 30, 2018.

The terminology about inflation can be confusing

Perhaps no other word in the English language strikes more fear in the hearts of consumers than “inflation”. It likely could also be said that a majority of those same people do not adequately understand the economic principles behind inflation. The confusion is understandable since economists themselves can spend their entire lives studying inflation and still be in disagreement about its specific causes and effects.

I’m not an economist, I just play one on this blog but facts are facts (paraphrasing what Dragnet’s Joe Friday once said) and that’s all I am dealing with here. Here are some important terms definitions you often hear talked about:

What is core inflation?

Core inflation is the measure of inflation that excludes certain items known for their volatility, like food and energy prices.

What is deflation?

Deflation is the opposite of inflation—a continuous decrease in prices, or continuous rise in the dollar’s value. During the Great Depression, Americans experienced deflation at its worst. Prices plunged, no one had money to spend, hire, build, or do much of anything. That didn’t change until WWII, about 15 years later. Deflation reduces demand since consumer spending is greatly reduced and in turn leads to increasing unemployment.

What is disinflation?

Disinflation is a slowing of the inflation rate over a period of time. For example, if the inflation rate was 1.3% in one month and moved to 1.2% in the next, this could be described as a period of disinflation. Deflation and disinflation are often confused. For deflation, the rate of inflation must actually drop to below 0%. If the inflation rate was very low to begin with, disinflation can lead to deflation.

What is hyperinflation?

Very simply, hyperinflation is runaway inflation—inflation that is totally “out of control”.

What is stagflation?

Stagflation is a period of time when inflation is high, economic growth is very weak, and unemployment is high.

What is a recession?

In the most simplistic terms, a recession happens when a country experiences negative growth over a period of time. Generally, it occurs when a country’s Gross Domestic Product (GDP) declines for two or more consecutive quarters.

What is a depression?

A depression occurs when a country experiences negative growth over an extended period of time, usually years.

How are CPI prices collected and does it actually reflect my spending habits or experiences with price changes?

The BLS has economic assistants who collect information on goods and services providers across the United States. According to the BLS, they record a sampling of prices on about 80,000 items updated monthly, creating the CPI.

When it comes to your own actual CPI situation, the numbers are not always accurate for you specifically. For example, the Consumer Price Index does not include spending habits for anyone living in rural areas, those in the Armed Forces, or those in institutions, like prisons. Specifically, the CPI includes data on the spending habits of two population groups: all urban (U) consumers, and all urban wage (W) earners and clerical workers. That group represents about 87% of the total population.

The cruel mistress does have real consequences

The 50-year average for the inflation rate going back to 1928 is about 4.0%. Let that sink in just a minute. At that rate of inflation, someone with $100 to spend in 1928 would need $1,425 for the same purchasing power today.

To put it in a more recent perspective, if you bought a car for $10,000 in 1998, you would need $15,548 to buy that same vehicle today! The effects of inflation are and must be examined and planned into all retirement financial considerations.

Right now is a good time to do something
(right now is always a good time!)

Some will tell you that inflation of 2.0% is a good thing. Some might say that wages are on the rise for the first time in two decades, housing prices have come down from the record inflated rates of just 10 years ago, and the stock market has set all-time highs this year. For some people this may be really good news. But for many others, those who are living paycheck to paycheck, are “underemployed”, have little or nothing saved for retirement, are suffering from chronic illness, etc., inflation and current economic trends are not quite as rosy.

The time to rethink retirement and put money into a retirement account is now.

Social Security and Medicare are in serious trouble and as I have noted many times, it was never intended to be your sole source of income when you retire. You cannot live on Social Security alone.

Look for other real sources of alternate income streams for after you stop doing the 9-5 routine!

Employment opportunities are changing and higher education is much more important now than ever in determining one’s chances of earning a good living and having a good retirement despite what the government thinks about the future of such occupations as coal mining.

If you are in your mid 40’s today and are looking at full retirement in 20 years (age 67), you can safely assume based on history that your buying power will be reduced in a similar manner as the past 50 years. And keep in mind, that doesn’t consider things that become more significant to older retired people like medical care and prescription meds which far surpass any inflation rate. That is why so much emphasis is placed on those things today. Fear of what is coming continues to grow.

If your money is in an account earning less than the current rate of inflation of 2.0+% you are losing ground.

If there is any kind of bright spot about inflation, it is having a long term debt that is payable for years like your home mortgage. That’s why I believe that owning your own home will still be a real part of American life. If you have a $1,500/month fixed rate mortgage payment now, then your future payments will be made in cheaper dollars. $1,500 a month has a very different meaning now than it will 20 years from now.

Are you comfortable with your retirement plan and the impact that inflation will have on your retirement? Are you saving towards that goal now or have you postponed it time and time again? What will you do if you have only your Social Security to depend on in retirement?


  1. Very informative post, Gary! So true: “right now is always a good time!”

    I didn’t know there was so many words associated with inflation. stagflation, really 😛

    I also think that having multiple streams of income can really help to fight inflation. And investing of course is the main tool against inflation.

  2. Prudence Debtfree

    Thanks for the lesson, Gary. I did not know the meaning of some of those terms. I think that to counter-act inflation during retirement, it’s important to have diverse investments. We are planning to set ourselves up so that our net worth continues to increase through retirement. I don’t like the thought of a depleting nest egg. Kind of scary.

    1. It’s great that you’re already contemplating how you’re going to deal with your retirement and its future now rather than later. It’s quite unnerving when you think of all the possible negative things that can happen once you stop earning a “regular income” and that’s why you have to be so diligent to make sure you have alternate sources. Scary can become reality pretty quickly. Good luck and thanks for your comments.

  3. Dave

    Great post, Gary. Moving forward, there are many factors that investors need to keep an eye on. Interest rates are increasing. That is a negative for borrowers, but a positive for savers because CDs are starting to have higher interest rates. Small-cap stocks have historically been a good hedge against inflation. TIPS or I-Bonds are also something to consider for fixed income. I am not a market timer, but those are a few options I am looking at.

  4. Yeah, under the mattress doesn’t work. Unless there is deflation. But no government wants deflation because people get crazy when that happens.

    So your point is correct… any account where the rate of income is less than the rate of inflation is losing you money. However, since some cash is always needed, managing one’s accounts so as to keep a small amount losing money instead of a large amount losing money is the right way to go.

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