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Why inflation isn't as bad as you think

Sometimes inflation can actually work in your favor.

By MSN Money Partner Jan 25, 2012 11:02AM

This post comes from David Ning at partner blog Wise Bread.


Wise Bread on MSN MoneyWhen you talk to baby boomers, it's not uncommon for the discussion to move to how much cheaper things were back in the day. "Coke was just a nickel! Hamburgers were selling for 10 cents!"


The natural progression in the conversation, of course, will lead to inflation and how destructive it could be to retirement plans.


Yet inflation isn't nearly as bad as most people think it is. Here are five reasons why inflation won't be as devastating to your retirement savings as you might think. (See also: "How to live with inflation.")


A significant portion of your financial assets are actually inflation-adjusted. You can flat out invest in TIPS, but even stocks will keep up with inflation in the long term. This is because while inflation initially affects a company's bottom line through cost increases, the company will eventually pass that on to consumers by raising prices.


Your house is another asset that keeps up with inflation fairly well. This is due primarily to rent and wage increases, which will both push up home prices in the long run. Post continues below.

Sometimes inflation can work in your favor. Tax brackets, for example, are inflation-adjusted so that you need a higher income to be taxed at the higher rates. In other words, you will eventually have a smaller tax bill over time unless your income actually increases. Retirement fund contribution limits also increase with inflation, which means that you can put more away for your future without Uncle Sam grabbing a share first. The maximum limit you can put in a 401k increased by $500 in 2012 due to inflation, allowing you to defer taxes for a larger amount.


Inflation probably isn't even why you're spending more. You are likely spending more because you inflated your lifestyle. Instead of a land line, you got a cellphone, and eventually a smartphone with that extra data plan. You used to eat ramen, but you've upgraded to that fettuccine Alfredo at a fine restaurant. You used to clean with a reusable cloth, but now you are using sanitized wipes.


It's not limited to upgrading your life either. When you weren't making as much money, you might've gone out of your way to switch your cable-TV provider every few months to take advantage of the broadband promotions that companies offered. But do you still do this? The good news is that there probably are alternatives you can find to cut costs if you truly have to do so. And since you already know you can live happily without the recent luxuries, you can rest knowing that you will be fine.


Some things are actually less expensive than before. Not everything always goes up in price. Technology, for example, seems to have a downward trend. And I know this is bad for me, but I've loved the McChicken sandwich ever since I was a little kid. On the occasional trip to the fast-food joint, I'm now paying $1 for each sandwich, as opposed to $2.50 in the '90s.


A significant portion of your expenses can be fixed. A monthly mortgage payment is a pretty big expense for most households, but you can choose to fix that cost for 30 years by applying for a 30-year, fixed-rate mortgage. You never know -- inflation may get so out of control that all you have to do to satisfy your monthly mortgage payment in a few decades is skip buying a few cases of Coke a month.


More on Wise Bread and MSN Money:

Jan 25, 2012 4:21PM

The only place there’s no inflation is at the Federal Reserve, in the real world where the rest of us live inflation is rampant.


If we used the same methodology to calculate inflation today as we did in 1980 it would be over 9%.


The author seems to be saying that inflation isn’t bad according to the way the government calculates it, but since they’re skewing the data their inflation statistics are of no value.



BTW look up the Boskin Commission.

This is either a idiot, a shill for the Fed or just so out of it that he can get published with a big response by upsetting everyone, soughta like Paris Hilton of finance. Buddy, go work selling those McNuggets and remember the catch words,"would you like fries with that?" JFL
Jan 25, 2012 6:48PM
Your house is another asset that keeps up with inflation fairly well. This is due primarily to rent and wage increases, which will both push up home prices in the long run


what is this author smoking?  After being in our house for over 33 years, the average  recent sale price in our neighborhood is around double our purchase price.  We've spent  that  much over the years in maintenance and improvements. The only thing that seems to go up consistently is our utility  bill...

Jan 25, 2012 5:25PM
Yeah, I buy technology everyday. Ever heard of food and gas?
Jan 25, 2012 5:55PM

Wow, The Mad Hatter now appearing on MSN.


I won’t even get into the social discourse of inflation over the decades and its impact on the structure of the American Family, single to dual income, just to maintain the basics. And how the kids have to help out now because educations expenses are going nuclear.


No, let’s just stick with the items in this premise:


1.The stock market compensates for inflation.

Had the stock market kept up with inflation the Dow would be around 20,000 or better depending on what expenses you include. This premise also assumes that the average American family has the discretionary income to invest, they don’t. They’re not even keeping up with the basics like healthcare.


-Your house is appreciating—that just boggles the mind. If you bought in 2010 or later maybe. That excludes most people. Everybody may not be under water but most home owners have lost value. 



2. Taxes

The author is only focused on Federal taxes and State taxes. County and city taxes are going up. They are broke, they need money so water services,toll roads,splost taxes,school taxes,gas taxes are going up. Pulse the Author has ignored the pass along taxes that companies asses, like the Phone and Cable companies tack-on's. You know, that FCC charge you see at the bottom of your phone bill.

3.It’s your fault, your living lavishly.

I like this one the best! Now let me just say, I do agree it’s insane that people will pay $100 or more per month for cable for what is basically 150 channels of re-runs. However the Chicken sandwich cost less because you get less. On a per ounce basis you are paying more.


4.Skip the coke, pay your mortgage.

He’s right about this one. Coca- cola prices are going through the roof! Berkshire Hathaway needs a better year. That or all the executives at Coke need new Audi’s and a better house, but hey, doesn’t that stimulate the economy?


Jan 25, 2012 4:59PM
It all depends on which side of the fence you are.  Take for example owning property/real estate. If you have inflation your property values go up. If your renting your rent payments go up. If property values fall and your renting your rent stays the same.
Jan 25, 2012 5:41PM

Whoever wrote that article would be great in comedy. What a total joke.


Jan 25, 2012 7:21PM

This hooey must have come straight  from Mr. Obama's reelection committee. Double whammy for us old retired farts living on a fixed income. Inflation + meager returns on years of savings thanks to "Big Ben"  are sinking us. Without a doubt the GOP will offer up another weak candidate this year so the only real threat to Mr Obama's hopes for a 2nd term are dismal employment numbers and inflation. I fully expect all economic numbers to be fudged over the remainer of 2012.

May 2, 2012 9:56AM
No author would even put their name on this article... it's "MSN Money Partner"... what integrity!
Jan 26, 2012 2:14PM

Deflationary cash is cold, cruel and our American Aristocracy. No one else. The minute Americans of modest to low incomes withdrew their cash from banks, banks thought they'd punish them by lowering the rate on savings accounts and feeing customers to death on checking. Smart Americans...we always know we have options. We started using our debit cards judiciously. Banks answer to that? Fee the debit cards...oh yeah? Try it. It's our money we allow these banks to hold. Banks then use money held for high risk investments. That's what's killing them and Wall Street. That there isn't a steady funnel from our paychecks to their high risk investment gambling. Boo hoodles.


Keep deflating Main Street. These dumb bunnies of Big Business will sooner or later wake up and smell the coffee. Who ever said that the only way prices can go is UP? What a load of long horn dung! Prices only go up because greedy people force them up. No other reason.


Perfect example of sheer Corporate stupidity. Big Oil worked hand in hand with Detroit to produce millions of gas guzzlers. Now gee...I can't imagine why can you? Maybe like forcing consumers of their product to buy more gasoline? Then these same stupids decided enough is never enough and went around jacking gas and oil prices. Stand by...Americans don't like to be hoodwinked. Detroit went bust and Americans went hybrid or alternative energy with gusto.


Prediction: Walmart with all of its foreign goods will be forced to increase prices making it on the same level as any other local small business enterprise and Americans will show their allegiance to their small businesses instead of a corporate vulture like Walmart and its associated minions.

Jan 25, 2012 5:36PM
What inflation? Home prices, which is your biggest expense is going down. As deflation intensifies, you will see the price of oil, food, gold, silver, goods and services come down. Your salary will come down too!! Google for deflationary crash to understand why money supply which is all nothing but credit can deflate despite Bernanke's printing press.

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