How concerned are you about inflation?
More than 1 in 4 folks say it’s their number one worry when it comes to the economy.1
You see it in the grocery store and at the pump. Headlines trumpet the latest numbers.
Their worries aren’t baseless.
Inflation is often called a “silent killer” because it quietly raises prices all around us.
But should you really worry about it?
Should inflation keep you up at night?
This what I’ll be talking about in this week’s podcast.
If you know how inflation works and you can keep your eye on the bigger picture, you won’t sweat the fluctuations — and you’ll be able to make better financial plans and decisions.
Sticker shock at the grocery store? Price hikes at the pumps?
Prices are going up and spending more for basics can be startling.
Do you remember the first time you noticed prices increasing? It often happens so gradually that we don’t even notice.
Inflation is often more complicated than we realize and it’ll be with us for the rest of our lives.
So, what could prices look like in 2030?
Let’s find out by looking at some historical data, and projecting how prices for things like food and housing could go up.
What Is Inflation?
Inflation is a measurement of how fast the prices of goods and services increase. As inflation rises, prices do too because it takes more dollars to buy the same things. Deflation is the opposite — it brings lower prices and more buying power.
Both inflation and deflation are tied to a complex web of economic factors — such as supply and demand, wages, government spending, taxes, and more.
The Consumer Price Index (CPI) is a useful indicator of inflation or deflation. It’s sort of a cost-of-living index, looking at price changes, over time, for the goods and services used by households.
According to Lawrence H. White at econlib.org, inflation rates since 1950, as measured by the Consumer Price Index (CPI), ranged from -0.7% in 1954 to a high of 13.3% in 1979. Although since 1991, the inflation rate has remained relatively constant, between 1.6% and 3.3% per year.
Using the latest US government CPI data from usinflationcalculator.com, an item that cost $100 in 2000 would cost $149 in 2020. And this 50% increase in cost, due to inflation occurred during a period of extremely low annual inflation rates.
Even low inflation rates can be a problem, over the long term. Inflation is extremely important for those living on a fixed income, like retirees.
So, what does all this mean for you and your money, right now?
Preparing for inflation is kind of like taking out financial insurance.
Even if you experience a small amount of inflation now, inflation is likely to increase in the future. The time to create a hedge against inflation, is now!
Inflation impact is very personal. For instance, if you are over age 50, own your own home, aren’t paying for education and have low medical expenses, then you will be less impacted by inflation than someone who consumes from more of the CPI categories.
Next, I’m going to review some prices and predictions based on historical averages going back to 2000 for different areas of spending.
Let’s review some
Housing
Average annual inflation rate: 2.39%1
Housing could be almost 27% more expensive by 2030.1 that means a house that costs $400,000 today could run you $506,388 in 10 years.
Depending on where you’re buying in the future, you could be paying much more than that. In fact, by 2030, the average home in Washington State will probably run you $782,708.2
If you prefer the Aloha state, expect to fork over $889,627 for an average home. And topping the list for the fastest rising housing prices is California, where the average home will likely cost more than $1 million by 2030.2
Food & Beverage
Average annual inflation rate: 2.33%3
Food and drinks may be about 26% more expensive by 2030.3 that means a trip to the grocery store that costs you $250 now could set you back more than $314.3
If you like fresh fruit, your grocery bills could climb higher even sooner. That’s because prices for fresh fruit have been rising at about twice the pace of meat, poultry, and fish.4
As food costs across the board continue to rise, they may not be the only thing about your food purchases that change by 2030. Your diet could, too. In fact, by 2030, more folks may give up red meat, replacing it with poultry and dairy products.5
Health Care
Average annual inflation rate: 1.83%6
Health care could be 20% more expensive by 2030.6 that means care costing you $5,000 today could cost you ~$6,000 in 10 years.6
In 2021, a retired couple was projected to need $300,000 in savings to cover health care in retirement. In 2030, those costs could rise to over $350,000.7
Gas & Transportation
Average annual inflation rate: 1.38%8
Fuel and transportation are likely to be nearly 15% more expensive by 2030.8 that means a car that costs $40,000 now could run you $45,858 in 10 years.8
However, electric vehicles (EVs) could act as a price disruptor. There could be as many as 145 million EVs on the road by 2030.9
Plus, some carmakers are working to cut the cost of batteries for EVs in half by 2030.10 Paired with self-driving technology, the transportation industry could look completely different in the next 10 years.
College
Average annual inflation rate: 4.93%11
A public four-year university may be about 62% more expensive by 2030.11 Annual tuition and fees of $4,000 today for a two-year college could cost $6,324 by 2030.11
For a four-year public university that runs you $20,000 today, you’re looking at $32,376 within 10 years.5 and a private four-year university cost of $44,000 could increase to $68,022 by 2030.11
However, the higher education industry is being massively disrupted by virtual learning and changing educational preferences. Within 10 years, these and other factors are bound to change, making higher education costs challenging to predict.
“Like many things in life and money, inflation isn’t always bad.”
Inflation Is Inevitable, So Figure Out How to Take Advantage of It
Inflation affects far more than upfront prices. It shakes up the costs of doing business and borrowing money. And it can affect savings, bonds, and plans for the future.
We often don’t notice these changes year to year, though.
That’s because inflation comes in small doses. A few bucks more here, a couple hundred more there — it creeps up over time.
And it’s the reason why inflation has a well-deserved reputation as a “silent killer.”
Still, like many things in life and finance, inflation isn’t all bad.
When steady and predictable, a moderate amount can be good as it can signal a healthy, growing economy.
Inflation causes problems when it increases suddenly and rapidly. Or when folks haven’t planned for future price increases. You must prepare for inflation, despite its advantages.
Here’s some ways to prepare for inflation….
- Inflation means rising prices, so stock up now on non-perishables, or items that keep for a while.
- If you’re thinking of buying a home or a car, you’re better off taking on the debt when rates are lower, rather than waiting until they rise along with inflation.
- The best investments during inflation include stocks that will benefit from rising prices. Treasury inflation protected bonds are designed to offer inflation protection, but give you very limited growth.
- Keep investing in the stock market, regardless of the economic scenario.
- If history is any guide, the longer your money remains invested, the greater average annual returns you can expect from your stock and bond investments. Keep your investing plan in place during inflationary periods.
- Real estate investing is a hard asset that’s easy to invest in.
- Retirees wondering what to do during inflation, consider waiting to take your Social Security pension. If you can hold off until age 70, you’ll lock in your largest monthly benefit. Your monthly Social Security check will be 24% larger at age 70 than if you began taking payments at age 67. Conversely, if you start early, your benefit might be reduced as much as 30%. Since your Social Security annuity is inflation protected the larger benefit that you receive at age 70 will continue to increase at the rate of inflation, throughout your life.
Have questions about how inflation works or what it means for you? Her Retirement is to help.
As a reminder, now is the time to create your plan for retirement…including a plan for mitigating the effects of inflation. Don’t procrastinate. Get her done. We can help. Just email me for details at lynnt@herretirement.com