Inflation

[Turf Doc]

Thought experiment:

Let's say I'm feeling good with my 2 million dollars I worked hard to save up. And your average person's plan for retirement is SS and the finest fancy feast money can buy. Then the gov gives everyone 5 million bucks, and inflation ensues. Isn't the person who actually had the money in the first place the one whose getting more screwed? Obviously an extreme example, but I was trying to think about how inflation might hurt those with money more than those we dont have it, provided those who dont have it are actually having access to the easier money that is causing inflation.

[CordMcNally]

Thought experiment:

Let's say I'm feeling good with my 2 million dollars I worked hard to save up. And your average person's plan for retirement is SS and the finest fancy feast money can buy. Then the gov gives everyone 5 million bucks, and inflation ensues. Isn't the person who actually had the money in the first place the one whose getting more screwed? Obviously an extreme example, but I was trying to think about how inflation might hurt those with money more than those we dont have it, provided those who dont have it are actually having access to the easier money that is causing inflation.

How is the person that had more money more screwed when everyone gets the same? They still have $2M more although that $2M didn't go as far as it once did. Sure, it minimizes what they did to save up that money but they're still better off than the people who didn't have that money to begin with.

[jacoavlu]

if you're holding cash yes inflation is bad bc fundamentally that's what inflation is, its a devaluation of the money.

hence to combat inflation you want to carry debt with a fixed low interest rate, and buy and hold assets

[Turf Doc]

How is the person that had more money more screwed when everyone gets the same? They still have $2M more although that $2M didn't go as far as it once did. Sure, it minimizes what they did to save up that money but they're still better off than the people who didn't have that money to begin with.

i'm just thinking that the delta in lifestyle between having 2M and having nothing is so much higher than the delta between 5M and 7M. For those who believe the stimulus and/or unemployment had a large effect on inflation, I mean think about how little in the grand scheme of things it costs for that to happen. The high earners on this forum are obviously very annoyed with inflation, but the stimulus checks were only like a few k per person and the unemployment a couple hundred bucks a week extra. That's nothing to many people here but may have had a large effect on their lived experiences nevertheless because of how other people were treating their money.

[jacoavlu]

i'm just thinking that the delta in lifestyle between having 2M and having nothing is so much higher than the delta between 5M and 7M. For those who believe the stimulus and/or unemployment had a large effect on inflation, I mean think about how little in the grand scheme of things it costs for that to happen. The high earners on this forum are obviously very annoyed with inflation, but the stimulus checks were only like a few k per person and the unemployment a couple hundred bucks a week extra. That's nothing to many people here but may have had a large effect on their lived experiences nevertheless because of how other people were treating their money.

i don't think that much of the "stimulus" went to writing checks to people. inflation is obv multifactorial but more important than UBI is gov mandated purchasing of debt which is effectively creation of new money, driving down of interest rates which disincentivizes holding cash and instead stimulates spending and investment in other things. Coupled with shutting down the world, and also giving people money to spend

[CordMcNally]

i'm just thinking that the delta in lifestyle between having 2M and having nothing is so much higher than the delta between 5M and 7M. For those who believe the stimulus and/or unemployment had a large effect on inflation, I mean think about how little in the grand scheme of things it costs for that to happen. The high earners on this forum are obviously very annoyed with inflation, but the stimulus checks were only like a few k per person and the unemployment a couple hundred bucks a week extra. That's nothing to many people here but may have had a large effect on their lived experiences nevertheless because of how other people were treating their money.

You're not necessarily wrong but I think any reasonable person would rather have the extra $2M in that situation. Printing money can make inflation worse but it's not the only thing that causes inflation. Years of bad energy policy are starting to become apparent to the end user as well as our (the US) reliance on many things we have no control over and have not made any efforts to change that.

[Turf Doc]

You're not necessarily wrong but I think any reasonable person would rather have the extra $2M in that situation. Printing money can make inflation worse but it's not the only thing that causes inflation. Years of bad energy policy are starting to become apparent to the end user as well as our (the US) reliance on many things we have no control over and have not made any efforts to change that.

I agree you'd rather have 7M than 2M. But i do think its interesting that, imo, in situation, the person who started with 0 and ended up with 5, was more positively affected by inflation.

You can even simply model it with SWRs. If the one with 7M was a good boglehead with a 4% SWR, and the nouveau riche use a 6% SWR, thats enough to be "poorer" than the person with 2M less, at least in regards to spending day to day.

[Tim]

if you're holding cash yes inflation is bad bc fundamentally that's what inflation is, its a devaluation of the money.

hence to combat inflation you want to carry debt with a fixed low interest rate, and buy and hold assets

Yes. Business cycle investing, minimize loss and maximize gain.
In theory, hard assets. They have a built in intrinsic value and low multiples. Then switch to service assets that have higher multiples on a recovery. Lose less and gain more. That is the cyclical theory. Good luck with that.

[CordMcNally]

I agree you'd rather have 7M than 2M. But i do think its interesting that, imo, in situation, the person who started with 0 and ended up with 5, was more positively affected by inflation.

You can even simply model it with SWRs. If the one with 7M was a good boglehead with a 4% SWR, and the nouveau riche use a 6% SWR, thats enough to be "poorer" than the person with 2M less, at least in regards to spending day to day.

Neither of them are positively affected by inflation. It’s a matter of who was negatively affected the least. Which one would you rather be? I bet the one that started with $2M does a lot better long term.

[Tim]

Neither of them are positively affected by inflation. It’s a matter of who was negatively affected the least. Which one would you rather be? I bet the one that started with $2M does a lot better long term.

What is missing from this equation is the actual need of the lower 50%. It is a real need. We have entered a period of a desire for wealth redistribution. Is $2m fair for those that have zero? Proposals on the table for take from one and call it a tax and redistribute via whatever credits or subsidies come to mind. Inflation will magnify the desire to take from the rich and give to the poor. Robinhood style.

[CordMcNally]

What is missing from this equation is the actual need of the lower 50%. It is a real need. We have entered a period of a desire for wealth redistribution. Is $2m fair for those that have zero? Proposals on the table for take from one and call it a tax and redistribute via whatever credits or subsidies come to mind. Inflation will magnify the desire to take from the rich and give to the poor. Robinhood style.

The only Robinhood I like is Robinhood: Men in Tights.

[Otolith]

elephant in the room: The $200- $4,000/month "check" in the mail from not having to pay student loans.

With the job market the way it is I don't see a logical reason (besides political suicide) to continue carrying forward student loan 0% forbearance.

[jacoavlu]

more inflation numbers out, and of course more changes to the methodology for calculating the number

https://www.bls.gov/cpi/notices/2017/methodology-changes.htm

with specifics to cars:

Changes to new vehicles source data and methodology


With the release of April 2022 data in May 2022, the CPI program plans to replace the data collected by the BLS for the new vehicles index with transaction data from J.D. Power. This index will continue to include prices for cars and trucks, but will no longer include motorcycle prices. Two special relative series that are currently published, new cars and new trucks, will also now be based on J.D. Power data. Publication of the combined new cars and trucks series will be discontinued at the same time. The full list of discontinued series is available online.

Seasonally adjusted indexes and calculated seasonal adjustment factors will continue to use BLS collected data, and will not take the new data source or methodology into account until the year 2023. Revised indexes and seasonal factors are available at Seasonal Adjustment in the CPI.

The Measuring Price Change in the CPI: Research new vehicle methodology factsheet is planned to be updated once this change takes effect. Research and the methodology leading to these changes are described in detailin a working paper: “A New Vehicles Transaction Price Index: Offsetting the Effects of Price Discrimination and Product Cycle Bias with a Year-Over-Year Index.” (posted January 13, 2022)

and from the referenced working paper:

A New Vehicles Transaction Price Index: Offsetting the Effects of Price Discrimination and Product Cycle Bias with a Year-Over-Year Index*

Abstract Using a new transaction level dataset on new vehicle purchases from J.D. Power, this paper documents violations of assumptions underlying cost-of-living theory and constructs a new price index that address these violations. First, we show that there are significant differences in consumer characteristics at different points in a typical product cycle, which suggests profit maximizing behavior through intertemporal price discrimination. When the composition of consumers changes each month, observed prices do not represent the purchases of a typical consumer at each point in time. Consumer segmentation violates assumptions necessary for measuring cost-of-living and can introduce bias into matched model price indexes. Second, we construct a price index that uses product age to control for consumer heterogeneity at different points of a product's life cycle. Specifically, we compare the price of a vehicle at a particular point in its life cycle to its previous-year's model at the same point in its life cycle, which we implement by assuming stability in the pattern of model year introduction and comparing each vehicle to its model year equivalent as of 12 months prior. Finally, this year-over-year price index does not convey information about short-run fluctuations in new vehicle prices, so we reincorporate highfrequency price change into the index by using a novel filtering technique. This new index averages 0.24 percentage points lower growth than the current CPI for new vehicles on an annual basis.

[CordMcNally]

Changing methodology doesn't fool the consumer. They don't care what the actual number is when they're buying gas, groceries, etc.

[Tim]

Changing methodology doesn't fool the consumer. They don't care what the actual number is when they're buying gas, groceries, etc.

https://m.investing.com/news/economic-indicators/us-inflation-eased-less-than-hoped-in-april-due-to-strong-core-cpi-2822554

Well, the narrative is “improvement”. 8.3% is better than 8.5%.
Wonderful. I would consider hoarding baby formula and selling it on EBay. Got some ethical issues to deal with though. Need a better handle on the “improvements” on the supply chain.
It’s probably less bad, maybe not.