We all know that prices typically go up over time: this is called inflation.
Inflation is generally a result of an increase in the supply of money. As more money becomes available, the purchasing power of a dollar drops. As the value of the currency decreases, the prices of goods and services increase.
We’ve seen this of late, with the Federal Reserve printing “stimulus checks” (and maybe another soon to come). So there’s talk of pending inflation on the horizon.
But does everything get more expensive over time?
Nope. Not everything. Take a look at these 5 examples, you might be surprised.
If you guessed this cost would have increased over time, you would be incorrect. Today the average is $41.89, which is cheaper than the $10.39 with inflation ($57.76). So, it’s roughly 27% less expensive today than in 1973.
Taking the family to Disney has gotten quite expensive, today costing $460. The $14 that it cost in 1971 is the equivalent of $85 today. In other words, prices today are 439% more expensive.
Most technology, including computers, have generally become more affordable. Today you can get one for $1,299. If you took the cost of the Apple Mac in 1984 and added inflation, that is $5,926. In other words, a Mac is 78% relatively cheaper today.
For those seeking an Ivy league degree, you could’ve obtained one at Harvard in 1870 for $150. With inflation factored in over the years, that’s the equivalent of $2700 today. The same education today exceeds $43k (which is, ahem…1503% more expensive today).
In the 1800s, you would be living large driving a Benz for $142, which is an inflation-adjusted $3557. You’d be paying more than 1031% higher for the Benz today, at a $40,250 base price.
Were you surprised at how some things have actually decreased in cost over time? I know I was. Although I know big-screen TVs are much more affordable these days!
The takeaway here is that though inflation causes overall prices to rise, in real terms, certain categories of goods tend to get cheaper over time.
Technology tends to get cheaper because of agents such as innovation, economies of scale, and competition.
Grocery costs have dropped overall due to agricultural expansion, exports, and an increased use of technology, among other factors.
However, other goods and services can increase by a shocking amount. College tuition is one example. The cost of nursing home care (around $8k a month) is another. In those cases, factors such as increased demand and societal shifts caused them to increase much more than overall inflation.
Household budgets have also changed over time.
In comparing today versus the 1950s, we are seeing much less on food as well as clothing. The cost of these items has been tame relative to other items.
On the other hand, Americans spend much more today on healthcare, housing, insurance, and retirement contributions. One of the questions I get the most is, “what is healthcare going to cost me?” Probably more than you’d think.
Interested in seeing how the products and services you use have been impacted by inflation? Feel free to use this inflation calculator.
What does that mean for us?
Bottom line, we need to take a hard look at how we account for inflation in our financial strategies. It’s not good enough to bake in a fixed rate of inflation, when critical categories such as healthcare or housing may increase substantially more than the average over time.
That’s one of the many reasons why we test a variety of assumptions in our models and build alternate scenarios to help ensure our clients are prepared for future price increases, even when they are unexpected.
In addition to toggling inflation assumptions regarding your earned income or projected retirement spending, we talk about ways to overcome inflation. Failure to do so can throw your plan off course.
We don’t know how much things will cost in the future, and it’s wise to build some wiggle room into your estimates.
Have questions about how rising prices could affect your financial future?
Give our office a call. We’re here to help.