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Inflation – Should We Be Worried?

I’ve been writing about money for almost eleven years now, and in that time the world has become an immensely richer place.

Here in the US, our economy has grown by about 25% even after inflation, world economic output has grown even faster, and the number of people living in extreme poverty has been cut roughly in half.

US Real Economic Growth over the Mustachian Era

If this seems like just a fluke, you might be happy to learn that it is not. This is just the latest decade in a long era of increasing wealth. Here’s a similar chart, but zoomed out to cover the past 1.2 centuries and include the whole world:

World economic output, even after inflation. What’s your guess at what might happen next? (source: Our World In Data)

If you’ve been following the Principles of Mustachianism for a while now, you have probably noticed the same thing: “Gosh Darnit, it may just be a long run of good luck, but today I am richer than ever!”

By the Way: Are you new here and ready for the full zero-to-hero program on wealth and less-ridiculous living? I have set up a Free “MMM Bootcamp” email series which you can join here if you click the drop-down box and find the “bonus option”.


No spam, no courses to sell, just the 35-ish most useful articles from the entire history of this blog, spoon-fed to you on a weekly basis until you graduate.

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For people who have combined solid money habits with this long economic boom, this means that early retirements have come even earlier than expected, and I have noticed the same thing: my own net worth has gone up several hundred percent since officially “retiring” in 2011. Sure, I’ve continued to live a somewhat reasonable lifestyle and spend less than I earn. But most of the boost has come from the increasing value of productive investments including houses, shares in companies, and local businesses.

Still,  throughout all this time, as the world churned on and we all got richer, I have received a stream of critical comments like this one claiming that Inflation is the critical flaw that means none of this is real:

Does Nick Have a Point? Is Inflation going to Kill us?

Inflation has been around since the dawn of money, so we know that it can co-exist with an increase in prosperity. But for the past few decades, the rate of inflation in most rich economies has been extremely low, which means it simply hasn’t been at the top of the news headlines. 

Until today, when inflation has made a sudden return.

Suddenly, everyone from Ted the Conservative Senator to Chad the Newly minted Bitcoin Bro is going off about about how “The Fed is debasing our currency by printing too much money“, “We’re already seeing hyperinflation” and everything is just about to slide into the shitter. 

 So should we be worried?

Well, let’s start by ignoring the talking heads and opening up a proper graph of what has actually been happening:

Red line: overall inflation rate over roughly my lifetime.
Blue line: same thing but with volatile food and energy prices stripped out.
Summary: inflation fluctuates, no big deal.

So it looks like this year, we are seeing overall prices rise at a 5-6% rate. More than the 2% we had become accustomed to, but far less than the 70s and 80s. But still, what does this really mean?

As always, Warren Buffett has a wise and concise opinion on the subject, paraphrased as:

“Over my lifetime, the US dollar has lost over ninety percent of its purchasing power. Yet even after adjusting for that inflation, the net output of our economy has grown by over twenty times – over 2000%”

So the opinions vary widely. But in order to form a valid opinion for ourselves, let’s just dive in and understand the underlying big picture. It’s surprisingly simple.

What Causes Inflation?

This part of it is quite intuitive: when too much money is chasing too few goods and services, you get inflation.

For example, If there is only one house for sale in town and you and I both really want it, we are going to place competing bids back and forth, and the seller will let it go to the highest bidder.

Houses are the perfect illustration of supply and demand, because people want them so much that they will go nuts trying to outbid each other, and thus the prices can get high. When this happens, economists say that the demand is inelastic.

Meanwhile, some things are considered less essential, which means our demand for them becomes more elastic. If you’re accustomed to buying bananas at 69 cents per pound and suddenly the price jumps to $2.99, your response is likely to be 

“TWO NINETY NINE!!!?? FUCK THAT WHAT KIND OF DAMN FOOL DO YOU TAKE ME FOR? I’ll just skip the bananas this week.”

Demand becomes even more elastic if we have the option of substitute goods. If you have just finished cussing out the $2.99 bananas but then see a pile of 99 cent per pound apples, you will likely just switch to the new fruit this week. And then do the opposite next week if the price trend reverses.

Price Competition

Meanwhile, all of this decision-making goes on in reverse on the other side of the cash register. If Pete’s Grocery store tries to jack up its banana prices to $2.99, but Jill across the street is still offering them for 99 cents, people will just vote with their wallets and Jill will get almost all the business.

Elastic Supply

On the other hand, if there is a worldwide shortage of bananas, then there just aren’t enough to go around. This causes more of that “selling to the highest bidder” we saw with the houses above, which means the wholesale prices that all the grocery stores have to pay goes up. Does this mean $2.99 bananas forever?

In the short term, yes. Bananas take a while to grow, so when you harvest them all, they are gone. 

In the long term, no. A tripling of the price of bananas means that the whole banana industry is now more profitable, which means more farmers will choose to plant bananas. Over time, the supply will rise and price competition will work out the kinks of the system.

In other words, in the longer term the supply of almost everything is elastic – if the price of something rises, more of it will eventually be produced. And then even more, and sometimes so much that the prices go back down below where they were in the first place.

The magic of economics is that in the long run, prices for almost anything compete themselves all the way down to the point where it is barely profitable to make a product. And this is why over time, life keeps getting cheaper and our standard of living keeps rising. Despite the fact that inflation keeps happening in the background.

Why Inflation does NOT mean we are getting poorer

If the price of bananas doubles, and your salary doubles, nothing has really changed: you can still afford exactly the same number of them. And with typical inflation, this is exactly what happens: the prices of everything gradually rise, including the price of labor (aka YOU), which means your paycheck rises.

Even if you’re retired and living off of your investments, inflation is typically harmless: the prices of assets (like houses, buildings, or slices of businesses known as “stocks”) also inflate right along with currency, so you are at least as well-off as before.

Even better, if you are a borrower, inflation actually helps you: If you borrowed $300,000 for a house ten years ago that is now worth $600k, the full value of the house is yours but the bank only expects their 300k back. 

In the Long Run, Technology And Trade are Deflationary

I bought my first Windows PC (a 486 DX2-80)  as an Engineering Student in 1994 at the staggering cost of $2600 ($4800 in today’s dollars!) Today, there is more processing power in a nine dollar WiFi smart outlet. And the $1200 high-end laptop I’m using to type this article would run laps around the CIA’s grocery-store-sized mainframe computers from the nineties.

When I was a kid, a gallon of milk cost four dollars (about ten bucks today). But you can still get a gallon for only four of today’s dollars in any grocery store. When my mom took me back-to-school shopping in 1984, I remember her wincing at the forty dollar price tag of Levi’s jeans, and today jeans are often under $20.

On and on the list goes: in the nineties a car that could hit 60 MPH in four seconds was called a “Lamborghini” and cost $250,000. Today that’s a base model Tesla that holds five people, costs five times less, never needs an oil change, and costs about eight bucks to fill up with 360 miles of electricity. Appliances are better and cheaper. Yesterday’s top luxuries are dumped on today’s Craigslist for almost free. University tuition is rising but education is far cheaper than ever. Medical procedures and doctor salaries are going up, but being healthy is cheaper and easier than ever – thanks to the wealth of free knowledge on what’s actually good for us.

And this trend is only getting started – technology is on an exponential curve and we are just starting to see its steepening trajectory right now.

Why Some Inflation is Good:

So, inflation is good for borrowers, neutral for investors, and it’s only bad for people who are either holding cash, or stuck with an income source that does not keep up with inflation. 

But it’s also good for the economy in general. Why? Because if people expect that prices will rise slightly over time, it encourages them to spend and invest right now. If prices are stable or dropping, we have an incentive to wait as long as possible to make a purchase, to get the lowest possible price. This isn’t just hypothetical – deflation has been happening in Japan for over 20 years, and has been a core part of that country’s chronic economic problems.

Because of this, the central bankers that pull the strings behind our economy (Federal Reserve bank and the Treasury) generally work together to engineer a controlled rate of economic expansion and inflation over time. If things get too hot, they slow it down by raising interest rates. If we have a harsh recession, they do the opposite and drop interest rates as well as “printing money” to purchase bonds, loans, sometimes even stocks in order to prop up prices and re-start the economic engine. This practice is controversial at times, but as you can see from stock and house prices, company profits and “Now Hiring” signs everywhere, it does work.

And Then Covid Hit

At last, we’re ready to understand what is happening right now, how we got here, and what will happen next. 

So we cruised our way through the 1990s, 2000s, and 2010s with lots of economic growth. There were occasional shocks (the Great Financial Crisis of 2008 comes to mind), and yet somehow the world cranked on. 

Until March 2020, when the entire world conducted an unprecedented experiment:

  1. We shut down many of our businesses, factories, and shipping ports.
  2. While simultaneously giving everybody free money and lowering interest rates in a (successful) bid to avoid a second Great Depression.

Item (1) is still having ripple effects: as different governments impose and lift lockdowns and quarantines, factories and shipping ports are still not up to full speed.

Then item (2) multiplied those effects because we were all stuck at home with extra money, meaning we spent less on restaurants and more on stuff from Amazon, appliances, new cars, and so on. 

And on top of that, the low interest rates made house payments more affordable, which allowed people to leverage even further to bid up prices of scarce housing. Businesses did the same, trying to expand and competing for the same scarce supply of products as everyone else.

While the pandemic itself took everyone by surprise, the aftermath has been completely predictable and straight out of an Economics 101 textbook. Which makes me happy, because Economics has always been one of my favorite fields.

So What Happens Now?

The first rule of this situation is the same as all other situations: don’t panic, and enjoy this whole journey as a learning experience. Prices will fluctuate, and the world’s economy will adjust accordingly in the coming years. You and I will continue to prosper.

The big picture magic is already starting to happen: supply chains are beginning to untangle themselves, and companies are making big new investments to increase production. Despite the rumors of “all the jobs going overseas”, the opposite is actually happening. Intel is building $20 billion worth of factories in Arizona to address the world’s semiconductor supply, and Austin Texas is now home to what will soon be the world’s biggest automotive factory. These are just two of thousands of similar projects around the world right now.

Meanwhile, while the big picture sorts things out slowly, you can also make some immediate changes in your personal financial life:

Don’t look at Prices, look at Relative Prices

Don’t get anchored on those 69 cent bananas, because 79 cents today may be exactly equal to 69 cents a few years ago. The real price has not risen, the currency has simply decreased slightly in value. What really matters is the cost of your lifestyle, as a percentage of your total income.

Your salary should also be rising. At least keeping up with inflation but ideally much faster if your skills are growing. If you don’t see this, negotiate a raise and simultaneously start shopping for new jobs.

For retired people like me, it can be helpful to compare the price of necessities to the value of my investments. I happen to have most of my wealth stored in the overall stock market through the VTI index fund, which has risen over 18% in the past year. Since consumer prices are only up about 6%, in reality everything should now feel about twelve percent cheaper to me today than it did even after this record year of inflation!

On top of that, you can always take some steps to lower your own “personal rate of inflation” even more:

Substitute things to create happier days and lower costs. 

If steak is getting more expensive, make something else for dinner. If gasoline prices are spiking, just plan your life to include more local activities and less driving. Also, electric cars, electric bikes and regular bikes are a big upgrade over traditional cars in every way, and you’ll never care about the price of gas again.

Delay expensive things. 

As a carpenter, my favorite hobby was hit by a massive spike in lumber prices last year. But I happened to have a long list of metalworking projects on my to-do list, and a sizeable pile of steel already sitting around. So I spent 2021 building all of the elaborate fences, balconies, gates and railings that I had been procrastinating on, and now enjoy the results every day. Meanwhile, lumber prices eventually dipped over the summer so I stocked up at that time too – and now I’m good for another year of hard work and creativity.

And so concludes our lesson on the current ‘scare’ of our news cycle. As always, it’s an opportunity for learning rather than worry, and even more importantly: you have more control over it  than you might think.

So here’s to 2022 – a year of happy Growth in all dimensions!


In the Comments: Have you been affected or at least concerned by inflation? Are the news headlines or conversations with your friends and colleagues making you feel better, or worse about the current economic trends?

  • Jacob Wade January 11, 2022, 12:10 pm

    Probably the most well-balancing approach to this topic I’ve seen. Thanks for using ACTUAL DATA instead of click-bait exaggerations to lay it all out.

    And I agree on the ability to use common sense to lower your own “personal rate of inflation” is probably the most powerful method here.

    Reply
  • Flo January 11, 2022, 12:10 pm

    The interest rate for the loan for my house expires in 4 years, then I‘ll need to renew the loan.

    Should I try to prolong the loan now (e.g. buy a forward) as insurance against rising interest rates in the next years?

    Thanks for your opinion.

    Reply
    • Mr. Money Mustache January 11, 2022, 12:54 pm

      Yes! I would certainly do that if I were in that situation, as long as the lock-in can be done at a reasonable cost.

      Over time, I would expect interest rates to rise in order to restrain the overheating economy – until the next economic shock/crash/recession, at which point they will drop them back down again and this whole cycle will begin anew.

      Reply
    • Andrew January 11, 2022, 3:00 pm

      Interest rates are still at near-historic lows. If possible, refinance into a 30-year fixed rate mortgage. It is still possible to get 30 years with rates below 3% in many areas.

      Reply
  • CapitalistRoader January 11, 2022, 12:14 pm

    I’ve got 10% of my net worth in Treasury TIPS, 5% in precious metals, 40% in Denver metro real estate, 2% in Bitcoin, and less than 5% in nominal bonds. The rest is in foreign an domestic equities. I figure when one zigs the other zags and I should be OK for inflation. But I do remember the late-70s/early-80s when 30-year mortgages were 14% and I was getting 11% on a six month CD. That would be terrible for young people with few or no hard assets. Hell, it was awful for retirees back then who were getting most of their income from nominal Treasury bonds. They were losing 10% every year on their 5% nominal bonds.

    Reply
    • Luitus January 18, 2022, 2:55 am

      My parents where one of the young folks in the early 80’s. Even though they were hit then by the high mortgages, the corresponding houseprices were really low. Banks determine the amount you can borrow from your monthly income. When you can spend 20k per annum on rents, this gives you a 200k mortgages when the rate is 10%, but it gives you 400k when the rate is 5%).

      At the same time this high rent corresponded to really high inflation (like 10%), leading to wage increases round the 10%+ mark. This meant that the monthly mortgages bill each year became 10% cheaper and that the amount of debt eroded away quickly (Inflation made the 1981 debt 10% lower in 1981 dollars compared to the 1980 dollars).

      When inflation subsided, mortgage rates lowered and house prices increased: new buyers could get twice the mortgages at a 5% rate compared to the 10%.

      Bottom line: I would rather buy a home when inflation is at the 10% mark (and mortgages around the 12%). House prices are low with a very high potential of increasing when inflation subsides, while at the same time inflation erodes the debt (50% inflation in 5 years means your debt also eroded away with 50%).
      This is exactly what happened: my parents debt has eroded away quickly, while the housing exploded.

      The inverse is true now: with low , but increasing inflation, house prices will get under preasure. The only good thing is that a increased inflation will mean that de debt also erodes away.

      Reply
      • Danny May 12, 2022, 4:11 am

        What if inflation keeps rising bud wages only increase 1 to 2% for a prolonged time?

        Reply
        • Derek July 21, 2022, 9:49 am

          That situation actually makes being highly leveraged extremely profitable.

          Let’s take a $300,000USD house at 5% APR with 10% inflation for 30 years at 0% down.

          Discounting amortization, after 15 years, you’d have paid $225,000USD interest in nominal dollars (15 * 0.05 * 300000), but the house would have appreciated to $1.2 million ($300000 * 1.10^15).

          So even if your wages dropped to 1/4th of what they were (1-2% wage growth vs 10% inflation x 15 years), you’d still have a large, inflation-adjusted asset base.

          Reply
          • Mr. Money Mustache July 21, 2022, 10:23 am

            Yes, pretty much ANY number goes crazy when you carry an exponent out over a 30 year period. Which is why it’s so easy to end up quite wealthy if you are willing to save consistently and wait such a long time. Since I was impatient and only wanted to work about 10 years, I had to force the math a bit by using a higher savings rate, but even this is pretty easy as long as you don’t insist on the typical level of waste and luxury that we practice in this country.

            One note however: Despite the 2020-2022 inflation spike, I would expect 2-3% inflation over the long term here in the US. Why? Because we’re already in a mild recession and all the leading indicators (commodity prices, housing inventories, future interest rate expectations) have dropped drastically, and meanwhile the technology sector is going to keep becoming a bigger part of GDP. Technology is a highly deflationary thing over the long run.

            However, I’m still running my financial life in the same way regardless of what happens (because my forecast is really just an armchair economist guess). Conservative and low leverage with low spending and high learning and effort. Easy does it!

            Reply
  • Mark Baldridge January 11, 2022, 12:16 pm

    Employees at my company (a global mega defense corporation) asked during a town hall, “what are you going to do about inflation? wink wink”. Their response was “We intend to remain competitive.” So we’ll see what happens during compensation planning in Feb and March 2022.

    Reply
    • Zac Gerhardy January 20, 2022, 2:05 pm

      “Companies everywhere are having these same problems”

      “We did market research and decided that we are actually pretty competitive compared to the data we collected from 2018”

      “Companies everywhere are having retention issues, a lot of time people aren’t even leaving because of pay, but for other reasons”

      My current company decided to hold back raises because of COVID concerns, had a record year, gave less than normal raises the following year, and doesn’t seem to understand why everyone wants a raise. I can only assume that they WANT me to find a new job.

      Reply
  • DuckReconMajor January 11, 2022, 12:17 pm

    Been wanting you to write an article about this and I clicked right away. I understand those without investments being worried about inflation but I see posts in FI/RE saying it’s some massive concern. I’ve seen no convincing reason inflation wouldn’t just raise the prices of your assets.
    That email mentioning gas prices was hilarious, I’ve always agreed with you gas is far too cheap in the US.

    Reply
    • Daren January 18, 2022, 5:24 pm

      USA is now upset about $3/gallon when I’ve been here in Australia and Gas (Petrol) has been around $5-$6 per gallon (adjusted for conversion) over the last 10 years I’ve lived here. So glad I don’t drive (Mustachian run/walk/bike commuter here)

      Reply
  • Canuck Rick January 11, 2022, 12:18 pm

    In the second paragraph after the heading “And then covid hit,” I think the spelling should be “world” and not “word.”

    Great to see another post. Very timely as well as usual. Cheers MMM.
    Ps. Hitting retirement this year at 40 after an Ah ha moment 6 years ago and grinding away until now. All the best.

    Reply
    • Mr. Money Mustache January 11, 2022, 12:56 pm

      Thanks Rick! Fixed the typo, and congrats on the early retirement!

      Reply
  • Eric January 11, 2022, 12:22 pm

    Great article. I also hope that invention and business will continue to grow GDP and continue to make inflation a moot point in the future.

    If we look at usdebtclock.org we can see debt + unfunded liability per citizen is now at $492,000. That’s a lot of debt. Almost a couple million dollars for a family of 4.

    I don’t see either political party stopping spending any time soon. At some point, there is going to be too much debt to be able to pay the interest if we raise interest rates. We’ll then need to inflate more to pay on the debt. No one knows exactly when this tips over and we turn into Venezuela.

    With any luck, we can keep inventing and finding easier ways of doing things and we’ll never hit the tipping point. During my Grandfather’s lifetime the average wealth of a human being in the US increased 8x! 800% richer in one lifetime! Looking at the promise of savings with new things like driverless cars keep me hopeful that technology can keep pace with the politician’s spending.

    Reply
    • Mr. Money Mustache January 11, 2022, 12:50 pm

      This is a whole other branch of the macroeconomic discussion that I was tempted to wade into in this article, but it was getting too long already.

      The quick answer is that you are right: governments LIKE inflation, because it allows them to pay back their debts to other countries with less-valuable future dollars. The net effect is that your country’s dollar drops in value relative to other currencies, and you must offer higher interest rates if you want to be able to resume borrowing.

      The lower dollar is useful in some other ways too: For example, CAT tractors and Tesla cars produced in the US and priced in US dollars are suddenly more affordable to buyers in other countries, which increases their sales and profits, boosts exports, and thus serves to restore the money flow back into the country and boost its economy. On the other hand, imports become more expensive but this can also be a domestic employment booster in some cases.

      So, governments tend to walk the fine line of pretending they don’t like big deficits and inflation, but still doing as much as they can get away with. In recent decades, the US dollar has held strong relative to other currencies despite our increasing borrowing – which has given us a hall pass to keep doing it. If global demand for our dollars decreases (or we lose status as the world’s reserve currency), you might see a big reversal in the deficit spending.

      For now though, some economists think it’s a good opportunity: take the free money, and use it to allow your own economy to expand. To the extent that it results in more national capital (infrastructure, housing, new businesses) being built, it is a real gain, as funny as the game seems on paper.

      Reply
      • nick g January 27, 2022, 11:01 am

        Agree here, but it’s a mistake to think the U.S. actually owes the debt to other nations. The debt isn’t really analogous to household debt, and other countries don’t act as our creditors in any meaningful sense. Most of the debt is rather in U.S. treasury securities. Basically others buy the treasury notes with the promise of interest in a handful of years. Some of the notes are owned by other nations, but mostly because they’re such a dependable asset, guaranteeing a reliable but low interest rate.

        Reply
    • Bill Muffi January 12, 2022, 1:55 pm

      Great comments. I just finished reading Ray Dalio new book The Changing World Order and it might be an interesting read on this inflation subject.

      Reply
    • JLPing January 13, 2022, 10:26 pm

      I used to worry about federal debt too until I read The Deficit Myth by Stephanie Kelton. Turned my opinion around 180 degrees. Boiled down, she explains that any sovereign government that prints its own currency can run as much of a deficit as it wants, with the only limiting factor being inflation. Since our era has been one of modest inflation, our current debt levels are surprisingly nothing to worry about, and in a way only represent the historical printing of money to add into the economy. Highly recommend this read to take the sting out of federal deficit/debt numbers.

      Reply
      • Mr. Money Mustache January 14, 2022, 3:08 pm

        Yep, the correct judgement on debt/deficit is not looking at what pessimist/pundits say, which is basically “Oh yeah. Sure there is lots of wealth going around right now but JUST YOU WAIT AND SEE!”, and instead looking at the actual response of the economy:

        – are people building and inventing new things, starting companies and raising competent children, or not?

        The whole purpose of a currency is simply to “trick” people into getting out of bed, doing productive work for the benefit of themselves and others, and then going to bed a little further ahead on average at the end of each day. There’s lots of noise and sideshows around this core activity, but if people are still innovating and taking care of each other, we are doing just fine.

        Much better explanation of all this here: https://www.mrmoneymustache.com/2014/03/03/why-we-are-not-really-all-doomed/

        Reply
        • Temazcal January 17, 2022, 4:35 am

          Great discussions.

          JFK nailed it when he said “the deficit can be any size, the debt can be any size. Provided they don’t cause inflation, everything else is just talk.”

          Reply
        • CC Rider February 3, 2022, 3:18 pm

          I honestly hope you correct about national debt not being a future threat to our economic well-being, but then I think about countries like Argentina, Greece, etc and am reminded fiscal irresponsibly does have consequences.

          Reply
  • Fred January 11, 2022, 12:25 pm

    Great post and perspective as always.

    This line: “generally work together to engineer a controlled rate of economic rate and inflation over time” I think has a typo — maybe you meant “economic expansion”?

    Reply
    • Mr. Money Mustache January 11, 2022, 1:02 pm

      Yep, another one of my many typos – now fixed and thanks Fred.

      Reply
  • Zack Harris January 11, 2022, 12:35 pm

    A fine, reassuring post that I’ve been waiting on for several months now. :)

    To answer your question: Before I discovered this blog ~3 years ago, I would absolutely be freaking the fuck out over the current state of affairs.

    But thanks in large to this blog providing me with the financial education/perspective that it has, I’m just sitting here on my lunch break, reading this article and wishing it was payday – so that another 401k contribution could be made while there’s a temporary little “dip” in the market.

    Happy new year, looking forward to reading more in 2022!

    Reply
  • Dawood January 11, 2022, 12:46 pm

    This is enlightening to me as I usually see the gloom articles about inflation.
    The only points I would diverge with is the people who are on fixed incomes and can’t obtain other sources of income become poorer.
    Also the ways the central banks act is not fair to the majority of the population as the banks get the most benefit and when it all goes wrong the public pays by bailing them out.

    Reply
    • Barb Ward January 14, 2022, 10:42 am

      yes, I agree with your diverging point. As someone on the brink of retirement….inflation is a concern. The rate of it is exceeding pension and SS increases. I do have some $ in stock, but probably too much cash. The people I feel for the most are those on fixed income without much in the way of assets to fall back on, or those not able to go out and get a post retirement job if they need to.

      Reply
  • Julia January 11, 2022, 12:46 pm

    I think it’s very important to remember that we were not all “stuck at home with extra money.” A lot of people lost their jobs, or, you know, *died of covid*. Many more are dealing with long covid and/or the mental health fallout of the pandemic, or had to quit to take care of their kids.

    I’m mostly suggesting here that we remember these people in our role as humans who care about other humans. But, as participants in and watchers of the economy, we might also consider how these large-scale changes in demographics, career trajectories, and worker health might continue to shape our economy and society going forward.

    Reply
    • Fred January 11, 2022, 1:07 pm

      I think this is a good reminder — to remember that we are not all similarly situated in life — not remotely. I do believe that the current bout of inflation is directly attributable to pandemic relief and loss of productivity in the country – so inflation was almost a necessary evil from that perspective – the Government really did need to inject cash into the system to take care of the poorest among us. And now, with that injection gone, for those on fixed incomes especially, this will be harder. I believe strongly in generous Mustachianism. This includes both giving of our own net worth but also of our time and support to the community… Late 2022 or 2023 could bring a recession. That won’t be the worst thing ever – the business cycle demands them every now and again – but things could get very difficult for the poorer among us as well as everyone around the world.

      Reply
    • Dori January 11, 2022, 2:28 pm

      Thank you for posting this reminder. I was going to say something similar, that a lot of us that are still working are working for businesses that are struggling. It’s a lot harder than it sounds to have your salary keep up with inflation during COVID-times. My husband had to take a 20% pay cut for a while, and mine completely eliminated raises for a year followed by lower than usual raises for year 2, in addition to medical expenses due to COVID and unexpected childcare expenses when schools shut down. I appreciate the “don’t freak out” lesson on inflation, but this does seem out of touch for people who still depend on a salary. Luckily, thanks in part to MMM’s earlier lessons, we have been able to weather this storm, but mostly just by treading water.

      Reply
    • Chris B January 12, 2022, 10:33 am

      Some of the earliest information about COVID, available in summer 2020, suggested a 1-2% fatality rate and some larger percentage of people (5%?) experiencing long-term disability. It also seemed likely that most people would be infected at some point, since we were already arguing about masks. At the time, it seemed to me like this would be the big lasting effect. Suddenly, the economy would have 3-5% fewer workers and maybe a lot more disabled people. Then you factor in lower labor participation by parents of children being home-schooled, and the lower quality of home-schooling by people not trained as teachers.

      It seemed logical at the time to conclude we’d experience lower long-term economic growth rates, and experience higher risks of a Japanese-style deflationary spiral.

      Although I was right to rough-estimate widespread infection and about a million deaths in the U.S. I was apparently wrong with my estimate that long-term economic growth would have to be lower. Even though the labor participation rate has plummeted and has yet to recover, ( https://www.bls.gov/charts/employment-situation/civilian-labor-force-participation-rate.htm ) the unemployment rate is suddenly <4%, S&P500 earnings for 2021 are printing far above 2019 levels (https://www.yardeni.com/pub/yriearningsforecast.pdf), and the stock market has boomed. Luckily, I saw the error of my ways early and went long in late 2o2o.

      The thing I learned is that there is virtually no link between economic numbers and the well-being of people. A million Americans can drop dead, and five million become disabled, and the effects for investors can be negligible. All that matters is Federal Reserve policy and Congressional stimulus. Even if the president's policies are completely dysfunctional and actually lead to the deaths – what matters is what the Federal Reserve is doing and whether Congress is handing out checks.

      To be clear, I'm not complaining. This is the 2nd time in the last 17ish years that the Federal Reserve and Congress have saved me from living through a repeat of the Great Depression. That's quite a favor they did, even if the price of bananas is no longer 25 cents a pound! Instead of desperately searching for work and eating half a can of beans for breakfast and the other half for lunch, I'm nearly FIRE and have plentiful alternative opportunities. Horray for John Maynard Keynes!

      But this episode suggests we should keep economic thinking and humanitarian thinking separate. Horrible occurrences on the humanitarian scale do not necessarily weigh on the economic scale. Similarly, no human being should ever think about sacrificing themselves in some way for the greater economic good, because it is clear that our lives are mere drops in an olympic size swimming pool.

      Reply
      • Julia January 24, 2022, 8:36 am

        Totally agree, except that I do not think we should keep economic thinking and humanitarian thinking separate. We need an economic system that values (or at least, doesn’t devalue) human life. I’m not saying I have one, but the one we have is clearly not it, and it’s horrifying.

        Reply
        • MKE January 26, 2022, 8:46 am

          Amen! Somehow, someway, an economy could be created that values values. Most of the inventions and innovations (I said most, not all) are pure crap, and many are mostly destructive. I read the book “Bullshit Jobs” and agree with its main premise: The more your job benefits humanity, the less you will be paid. The less your job benefits humanity, the more you will be paid. Most white-collar jobs are bullshit, and this is a huge reason behind the attraction of this blog. On a subconscious level, people want to stop wasting their lives making money doing harm and get on to doing something intrinsically rewarding. In my opinion, some of MMM’s message is that there are limits to medicating yourself with money.

          Reply
    • Nic January 14, 2022, 7:28 pm

      Yes – as a health care worker I want to acknowledge this also. And, our wages are capped at a 1% increase for the next 3 years. So despite being called “heroes” and having worthwhile skills, we are not keeping up with inflation.

      Reply
  • Alistair Twin January 11, 2022, 12:50 pm

    One thing that makes america particularly isolated from inflation is that your mortgages are more likely to be fixed rate for longish periods of time.. in the UK people are likely to be on a cycle of 2 years of fixed rates.. 5 is becoming more common but not the norm… this means house prices (and housing costs) are more likely to swing a bit with interest rate swings.. but you are totally right that it’s only a problem if you absolutely need to sell now or if you were at the very bleeding edge of affordability

    and it’ll be a long time before we are back up to the rates of 4 or 5% that were the norm 10-15 years ago (1.7 -2 is about normal at the moment..which is crazy)

    Reply
    • Fred January 11, 2022, 1:08 pm

      Do you know why this is (that UK mortgages tend to be on variable rate loans)?

      Reply
      • Andrew January 12, 2022, 6:47 am

        The US is one of the only places in the world that does 30 year fixed rate mortgages — it’s mostly because of government intervention in the mortgage market. Fantastic article about it here: https://www.netinterest.co/p/financing-the-american-home

        In other countries, banks (or more accurately, investors who buy mortgages off banks) just aren’t willing to take 30 years worth of interest rate risk. But the trade-off is that we get better rates in the short term.

        As an example, one (US) commenter above was talking about a 3% 30 year fixed mortgage. In contrast, my wife and I just refinanced our mortgage here in the UK, and we got a 1.19% rate, fixed for 5 years. After the end of the 5 years, we can either go on to a variable rate, or find another fixed rate deal, which will depend on what interest rates are like in 5 years.

        Reply
        • Fred January 12, 2022, 11:45 am

          Thanks for sharing!

          Reply
        • charlie January 13, 2022, 12:17 am

          And everyone is buying properties on the assumption that rates stay low forever, see the income to property prices of new zealand /aus/uk. If rates were to spike up at refi dates?

          Very interesting that the US is effectively subsidized, those 30y fixed mortgages are very tempting =)

          Reply
        • Ditte January 13, 2022, 1:14 pm

          In Denmark, the other place this happens, the norm has been 30 yrs 0,5% fixed rate loans. But now they are up to 1-1,5%.

          Reply
      • Chris B January 12, 2022, 10:38 am

        Andrew is correct. Basically it amounts to a government subsidy of homeownership, which knocks 2-3% off of our mortgage interest rates and allows for the purchase of bigger and bigger homes at higher and higher prices. Taxpayers are ultimately on the hook when defaults occur, as we were in 2008.

        So taxpayers are paying money to inflate their own cost of housing. What could be more American than that!

        Reply
  • Chris January 11, 2022, 1:05 pm

    MM – I agree with much of what you said, but with respect I think you mischaracterized the problem some folks like me are worried about. It’s not that inflation is 6% this year. It’s that if you look at the FRED graph of money created (https://fred.stlouisfed.org/series/M1SL) it looks like a hockey stick and a bit scary and unprecedented. Better than crashing and burning in 2020 as you point out. But hardly reassuring that everything will be fine in the coming years.

    Assets will rise, yes. Everyone with assets will generally be fine. But the lower middle class and the poor will have it pretty hard if wages don’t rise dramatically and quickly. Things could get ugly and social problems / unrest are quite possible. I do hope that things work themselves out as you suggest but in my opinion, it’s not a given and we are still living in a grand financial experiment.
    Best,
    Chris

    Reply
    • O January 11, 2022, 1:52 pm

      The M1 money supply is not as bad as you think because it only went up in May 2020 so drastically because it was redefined to include money in savings account. While a lot of money was still printed, it’s not as drastic as this graph suggests.

      Reply
      • Chris January 12, 2022, 11:08 am

        My bad, poor choice of graph! You are correct. M2 is a better graph: https://fred.stlouisfed.org/series/M2SL

        And while less drastic, it still basically shows an unprecedented amount of money creation which to me is counter to the narrative that this is just like previous cycles of higher / lower inflation. BTW, for those interested in this topic, I really enjoyed and learned a lot from “The Price of Tomorrow” by Jeff Booth.

        Reply
        • Noah January 16, 2022, 4:51 am

          If you switch that M2 graph to a log scale it looks like a more or less straight line, and perhaps our rate of money generation is even less since 1995 than before.

          Reply
    • David Proudfoot January 11, 2022, 2:13 pm

      Ironically, one of the side effects I’m worried about from the printing of money is an unintended and undesirable increase in the wealth gap. The government hands out stimulus checks to provide assistance to the most in need during the pandemic, arguably a good thing, but this money has to come from somewhere. It would be politically unpopular to charge the non-recipients directly with some sort of tax, so instead the money is printed. This in turn helps drive the inflation that we’ve seen, meaning that everybody effectively pays the bill over time.

      Fortunately, Mustachians practicing intentional spending and aggressive saving and investing are protected from this inflation by the way of the productive assets they’ve accumulated. Inflating prices means the goods sold by the companies underlying the equities we hold also inflate, and so their profits inflate, and so our returns inflate. Similarly, increasing housing prices mean Mustachian landlords see good returns on their real estate portfolios as rents and property values rise. There may be some lag, but in the long term, inflation isn’t much of a worry (at least logically, maybe not emotionally) for those holding productive assets.

      Meanwhile, the super wealthy are also likely to have a good portfolio of inflation insensitive assets. However, the people receiving the bulk of the stimulus money are the least likely to have any such assets, making them the ultimate victims of the money printing driven inflation, undoubtedly increasing the wealth gap. Hopefully the short term boost during the time of crisis will have been worth the long term pain.

      Reply
    • Alex January 11, 2022, 2:26 pm

      Are you just referring to the reclassification of savings accounts in April 2020? While there was a lot of money created since 2020, it is nothing like what the misleading M1 graph shows. They even explain that in the footnotes.
      https://fredblog.stlouisfed.org/2021/05/savings-are-now-more-liquid-and-part-of-m1-money/?utm_source=series_page&utm_medium=related_content&utm_term=related_resources&utm_campaign=fredblog

      Reply
    • Debbie M January 11, 2022, 2:41 pm

      Yes, and as we learned from the housing crisis, just because our mortgage wasn’t stupid did not mean we were not affected.

      I wondered if it were true that wages generally do keep up with inflation, and the longest time period for which I could find information was “Real Wage Trends, 1979 to 2019” (https://sgp.fas.org/crs/misc/R45090.pdf). The answer is yes, except for some of the people who most need it to keep up: the poor, minorities, the less educated. [I found myself in that report: “For some low- and middle-wage worker groups, however, these educational gains (I have a master’s degree) were not sufficient to raise wages.” Yep, I worked for the state, and my wages were always sucky.]

      So I’m also especially worried about young people. A lot of their jobs are notoriously horrible, though maybe their refusal to accept those conditions will help. (Or maybe inflation will only make it look like it’s helping.)

      As for me, I’m on a pension (which technically could get cost-of-living increases, but hasn’t for years and years). My house is paid off (yay!), but my property taxes are going through the roof. That’s something I can’t really control without moving to another part of the country. I already live in one of the least expensive houses in my area, and there’s gentrification as well as regular inflation.

      Fortunately, I do have a pretty big IRA that is outstripping inflation like crazy (though I’m trying not to tap into it yet) and I’m still frugal and learning more of those skills (mmm, who knew polenta was so tasty?). And I contributed the full 30 years to Social Security, which does increase with inflation at least somewhat, so that’s another bonus for my future. So overall I expect I’ll be fine.

      And eventually covid will probably evolve into something less horrifying, so the supply chain issues will get better, despite the anti-vaxxers. Though the medical worker burn-out crisis may never recover (there was a shortage even before covid), so we all definitely need to keep focusing on staying as healthy as we can and doing as much preventative care and testing as we can.

      Reply
    • Chris B January 12, 2022, 10:53 am

      Perhaps the questions we should be asking are:

      1) Why do measures like M1, M2, and M3 seem to be unrelated to actual inflation (e.g. CPI)? Is it easier to assume the relationship works on a 30 year delay, or is it easier to assume there is something wrong with our economic theory that these things should go together?

      2) How could USD money supply charts NOT look like a hockey stick when so many tens of millions of people around the world are entering the middle class every year, trading their wares for dollars – the international standard unit of currency, setting up dollar-based saving accounts, and encouraging their own governments to hoard dollars as reserve accounts to support their local currencies. In supply/demand terms, the demand for a relatively stable and universally accepted currency is through the roof. If the US DIDN’T supply more dollars, we’d have a deflationary depression as exports and forex trades sucked all the dollars out of the domestic economy.

      Reply
    • Trevor February 23, 2022, 1:57 pm

      This is the most intelligent comment I have read in this thread so far. The real growth in the stock market is not very good. The S&P divided by the money supply is basically flat over the past 10-20 years. It has been inflated with an unprecedented increase in the money supply. What you get is a K -shaped recovery. If you own assets your assets absorbed this excess money. Long term effects will be terrible for the poor and middle class. Wages are not keeping up with inflation. Real purchasing power is going down. Debt to GDP ratio is as historic highs. We are reaching the end of a long term debt cycle.

      I love this blog and if got me saving money. But ya’ll need to get outside of the MMT bubble. Check out this website showing real data:

      https://wtfhappenedin1971.com/

      Read “The Price of Tomorrow” by Jeff Booth to better understand why an inflationary money system coupled with the deflationary reality of advances in technology are at odds.

      Reply
  • Rob N. January 11, 2022, 1:13 pm

    Totally agree! With substitute goods, inflation is a choice! I bought two massive bags of groceries from a Los Angeles Trader Joe’s yesterday for $31.50. Enough food for at least a week for two people. A single huge eggplant cost $1.39 and was more than I could eat in one sitting!

    Thank you for an excellent and timely article.

    Reply
  • Accidentally Retired January 11, 2022, 1:28 pm

    Wow. This is the most nuanced and detailed article I have seen on inflation yet!

    I love the line “While the pandemic itself took everyone by surprise, the aftermath has been completely predictable and straight out of an Economics 101 textbook.”

    Also, this post is a good reminder that markets correct themselves and we are just in the midst of seeing some of the many corrections and trickle down effects from printing money and constricting supply.

    Reply
  • Brent January 11, 2022, 1:39 pm

    I am so thankful that you still find the time on occasion to bring a healthy dose of reality/optimism.

    Despite all the complaints I hear from friends and family, the amount of voluntary purchases everyone has been making seems like proof enough that our economy is still going strong. And maybe more importantly, it shows that many folks have the power to make small changes that can completely negate the effects of a little inflation if they wish.

    Reply
  • Kim T January 11, 2022, 1:49 pm

    Does this make you uneasy? Does it ever feel like our system is squeezing the earth (as opposed to technology giving us cost-free improvements):

    “When I was a kid, a gallon of milk cost four dollars (about ten bucks today). But you can still get a gallon for only three of today’s dollars in any grocery store. When my mom took me back-to-shopping in 1984, I remember her wincing at the forty dollar price tag of Levi’s jeans, and today jeans are often under $20.”

    Having designed computer chips and also been a farmer, I can tell you that biology does not support the kind deflationary examples you are giving. The cows biology isn’t changing enough to warrant milk getting cheaper – it’s the infrastructure around the cow. Same for the jeans. It’s the chemicals we push the soils with to grow the cow and cotton, it’s the oil we power the shipping routes to process the cotton overseas and centralize the milk processing. I’m not trying to be negative, but I guess I’m just not as sold as you are on technology improvements coming for free. At the end of the day biology will limit us, one way or another.

    Reply
    • Mr. Money Mustache January 11, 2022, 8:18 pm

      Good point Kim! I agree that a happy medium would be much better in this situation (which is partly why I don’t drink milk at all and my son gets the $6.89 organic free-range stuff). Better automation in garment factories and direct-to-consumer sales which cut out paying the department store’s 50% margin and the shopping mall are good reasons for lower clothing prices. But sweat shops and unsustainable agriculture are not.

      Patagonia is an expensive but good place to get some of your clothes, and they are intended to last many years. Even better if you can find some of them at a thrift store!

      Reply
    • Another Joel January 12, 2022, 10:57 am

      Actually, the cows’ biology is changing over time. Milk production per cow, per year, is up 11% in the past decade. https://www.nass.usda.gov/Charts_and_Maps/Milk_Production_and_Milk_Cows/cowrates.php
      I don’t have a source for a longer period of time, but annual production per cow has essentially doubled in the past 40 years. Dairy genetics is a pretty wild small slice of the world economy.

      Reply
    • Pierre January 18, 2022, 8:41 pm

      Reduce, repair, reuse and reduce: Good against inflation, good for health and mind, great for this finite planet we’re living on.

      Reply
      • Bonnie February 5, 2022, 10:16 pm

        And, as my dad taught me, add “refuse” in there before reduce.. So many things society is selling that we need to say no to. Refuse, reduce, reuse, repair, recycle.

        Reply
  • Mary P January 11, 2022, 2:05 pm

    Very balanced write up! I think what would help people as well is to know what makes up the Consumer Price Index (CPI). Gas and used cars are driving (no pun intended) a lot of the increase in inflation. I bike almost everywhere and have a 2013 car, so inflation has barely touched me.
    November 2021 YoY data: Gas–58% increase, used cars and trucks–31.4%, new vehicles–11%
    BLS data: https://www.bls.gov/opub/ted/2021/consumer-prices-up-6-8-percent-for-year-ended-november-2021.htm

    All the more reason to get an ebike or drive less. Save yourself a ton of money and also be less impacted by inflation.

    Reply
    • Mr. Money Mustache January 11, 2022, 8:15 pm

      Yes! The makeup of the CPI is whole additional can of worms that I would have loved to get into (and make fun of) in this article.

      “Gasoline” is particularly hilarious. So you bought a 14 MPG pickup truck and then bought a house 30 miles away from work, and you have a boat that you like to tow, and now you’re sad that it costs you a bit more to move all of those empty, useless tonnes of metal around pointlessly in order to move your tiny flabby body!? LET ME GO FIND MY TINY VIOLIN TO PLAY YOU A SYMPATHY SONG!!!!

      Meanwhile, the average consumer could sell their crap SUV for top dollar today and downsize to a 60MPG Prius of a similar model year, and never care about gas prices again.

      And of course, the Mustachian consumer figured all this out eleven years ago and hasn’t cared about the price of gasoline since.

      Still, increasing fuel prices do feed into the prices of everything else – concrete, deliveries, airline tickets, etc. They will still be reflected in inflation, but this is a reason that “Core CPI” – which strips out direct energy and food prices – might be a better measure for wiser consumers.

      Reply
  • Luke January 11, 2022, 2:07 pm

    Another HUGE point is that MMMers by definition and design use WAY less materials, services, and inputs than ‘normal’ people. Gasoline could go to $10/gallon, and it wouldn’t affect those who have reasonable commutes, or E-bike commutes. It is catastrophic if you commute 110 miles in a F-150 Raptor that you still have payments on. The MMM lifestyle is both inflation and deflation proof by definition, which is the utter beauty of it all. You can care less about the prices of the goods that you really don’t need or want.

    Reply
  • Lewis January 11, 2022, 2:17 pm

    Great article. I’d be keen to see you write confronting a couple of the underlying issues that could make that historic upward trend look like an anomaly within the next century – climate change, declining energy return on energy investment/increasing difficulty of extracting and processing raw materials, degraded soils, fisheries collapse. There seems to be a lot of techno optimism around these things but that seems a bit foolish. I’ve looked into the mining issues a bit and it seems like their answer is that technology has always kept up so surely it will continue to do so and anyway, there’s plenty of metal if we can just get rid of all these pesky people and sensitive ecosystems living on top of them. Oceans are doomed, obviously, but what will that mean about global food supplies? Soils might be turning around with a huge growth in regenerative agriculture but the rest seem rather existentially challenging.

    Reply
    • The Estranged Yooper January 11, 2022, 3:36 pm

      Man if oceans are truly doomed, what does that mean for our oxygen supply. At least half the Earth’s oxygen supply comes from those little plankton. I’m not worried about mining, but I just saw the movie, “Just Look Up,” and it did make me ponder the reaction to the whole global warming / ice melting / ocean acidification thing. It would be good to hear an optimistic take on the human extinction thing.

      Reply
    • Mr. Money Mustache January 11, 2022, 8:37 pm

      I am definitely with you on climate change and other ecosystem issues- that shit is a bunch of big, expensive foolishness we are imposing on ourselves. The primary reason for this entire website’s existence since 2011 is reducing environmental destruction by encouraging wealthy people to consume less.

      However, I am way more optimistic than you on energy – especially EROEI as you cite. That was a valid theory back in 2011 when we were facing declining oil production and didn’t see our way out of it. But today, solar and wind are so cheap and abundant (and manufacturing the stuff to harvest them is so easy and relatively benign relative to their energy output), that I am downright gleeful about humanity’s energy future. Free hot tubbing for everyone!

      And that’s before we even get into better nuclear power, which is now coming quicklyyyyyy (see the Gates Notes newsletter to keep apace on some of it)

      Reply
    • Noah January 16, 2022, 5:06 am

      There was a time when we we sure color tvs would become the dividing marker between the haves and have nots of the world, due to the necessity of europium to manufacture them which was a relatively limited resource at the time. We could have possibly guessed that there was more europium available than we thought, but more importantly no one at the time could have imagined an LCD screen, which is made from more common materials, would solve the problem regardless. Besides that we found enough europium to make a cathode ray color tv for everyone in the world multiple times over anyway.

      Reply
  • PD January 11, 2022, 2:19 pm

    Like much FI discussion, it boils down to everything will be fine in the long-run but there could be some pain and cuts in the short to medium term. I like the optimism but I don’t think we should be so dismissive of that short-term pain.

    Yes, retired people will be fine, but not everyone’s employer will give them raises in step with inflation. And some people aren’t fortunate enough to have a great deal of job power / quitting flexibility.

    It could be pretty tricky for people with income / assets that *don’t* keep pace with inflation – like social security, or a large bond portfolio.

    Also stocks didn’t really keep pace with inflation in the 1970’s. They basically stagnated (“stagflation”). 10 years is pretty long to go sideways – not everyone has as long a time horizon as you. So yes the media overplays some things, but I think what some people are worried about is a repeat of the 1970’s. Or just a big crash / recession. Ie, near-term pain is still real.

    Overall a good summary. Would be nice to get some perspective on bonds, and whether stocks are really inflation-protecting in a protracted stagflation envt.

    Reply
    • catbert January 12, 2022, 2:35 pm

      Yep, I was a young adult Federal employee in the 1970s. Salaries definitely didn’t keep up with the COL – inflation 10%, raise 5%. Even if they had given me a raise of 10% because inflation was 10% the previous year I’d still have been a year behind. Luckily I bought a condo in 1975 for 35K (interest rate of 12% iirc) and sold it in 1982 for 100K to buy a house. If I hadn’t bought my first property until 1980 it would have been a much uglier story.

      That said, inflation didn’t kill me and my mom enjoyed 10% 10 year CDs in the 80s.

      Reply
      • Mark January 13, 2022, 2:37 pm

        Imagine what would have happened if she would have invested in the S&P 500 rather than CDs?

        In the early 1980s, stocks were absolutely HATED, and Business Week magazine even went as far as to proclaim the “Death of Equities” – the S&P 500 then had a PE of 8 and a dividend yield of 6%!
        $10,000 invested in 1982 would be worth $887,362 today!
        That’s $299,180 (a 30x return) in constant 1982 dollars!
        Holy smokes!

        Reply
  • Michael Evanoff January 11, 2022, 2:35 pm

    I think that you may be discounting the horror of the 60’s and 70’s. Take a look at the S&P 500 from 1960 to 1990 (Use this link and turn on “inflation-adjusted and log scale” https://www.macrotrends.net/2324/sp-500-historical-chart-data)

    Now, imagine that you invest $1 in January 1962. It won’t be until October 1988 when that dollar STAYS worth more than your original investment. Sure, there were a few ups and downs and your dollar would have been worth a little more for short periods of time, but it will be 16 years until the $1 stays $1. In the meantime, for 16 years, you have to pay your bills and live your life, pulling out and spending money that has most likely gone down in purchasing power.

    As inflation goes up, bonds will look more attractive, sucking money out of stocks. Your 3% dividends aren’t so attractive anymore, so your defensive stocks tank, too. Now, your stocks are flat or declining in a period of high inflation. Talk to someone who lived through that era, ideally someone who had investments during that period. Buying apples instead of bananas was not the salvation.

    Also, the “too much money chasing too few goods” idea is a bit dated at this point. Modern monetary theory has some new ideas.

    Reply
  • Paul January 11, 2022, 2:46 pm

    As per usual, sensible and thoughtful but a comment to help add a dimension for other readers.

    You accurately noted: “But it’s also good for the economy in general. Why? Because if people expect that prices will rise slightly over time, it encourages them to spend and invest right now. If prices are stable or dropping, we have an incentive to wait as long as possible to make a purchase, to get the lowest possible price. This isn’t just hypothetical – deflation has been happening in Japan for over 20 years, and has been a core part of that country’s chronic economic problems.”

    Accurate but I think it worth noting that good for the economy is not synonymous with morally good. They aren’t opposites (I have no problem with increasing wealth!) but I do think that our consumption is a big driver of our climate problems. I vaguely recall you noting the same thing in the past (I can’t find the post but you were responding to the brickbat that “if everyone lived a mustachian lifestyle, the economy would collapse”) and so just wanted to say that, even if it meant our surface wealth increased a little slower, most Americans really do have a (relative to much of the world) luxurious lifestyle and we could feel wealthier and be happier even if we spent less. Bikes rather than SUVs, as a simplistic example. But, as always, it’s a balancing act between providing for people and solving climate change.

    Reply
    • Jasmine January 12, 2022, 12:04 pm

      I was surprised to see MMM get so wholeheartedly behind the idea of the policy of inflation used to artificially stimulate demand for consumer spending. The reference to Japan is particularly interesting, because by many accounts the economy of Japan is fine, there is no catastrophic economic collapse, and the Japanese are far less consumption orientated as a society than the US, I don’t see how this is a bad thing (environmentally speaking) https://en.wikipedia.org/wiki/List_of_countries_by_household_final_consumption_expenditure_per_capita

      Reply
  • Chris January 11, 2022, 2:51 pm

    I guess it’s one of these things that are scary in theory to me, but on a personal level, it does not really affect my day-to-day. I am older, close to retirement, have very little debt, and treat work as something that I do because I need medical insurance for my son. I think 20 years ago, when my husband and I were in debt and on a gerbil wheel of work, pay for crap, rinse, repeat, this might have worried me. When we are on that perpetual gerbil wheel we worry about things like losing our jobs, paying our bills, and having enough money to float out the good or the bad that life throws at us. Now, I don’t worry so much, because all I can control is my little world which means having some money in the bank, living frugally, and enjoying the simple things in life. I pay as I go, easier.

    Reply
    • MKE January 19, 2022, 8:28 am

      Right. If you have money, life is easy. If you don’t have money, life is hard. Money smooths out the bumps in ways that people who have always had money cannot possibly imagine.

      Reply
  • Casey Anderson January 11, 2022, 2:56 pm

    Great optimistic article as always. I like the point about technology being deflationary, not just in electronics but in many areas of the economy. What doesn’t seem sustainable to me is continuing to target a 2% inflation rate when technology is fighting that trying to bring prices down. Why can’t we let things get cheaper because of technological advancements? You would be able to buy more with your money over time not less. Keeping inflation at 2% forever is an implicit tax on everyone holding dollars. Instead of letting people benefit from the deflationary nature of technology, that value is taken from everyone through inflation and distributed by politicians and banks.

    This is partly why I have added bitcoin to my investments starting about a year ago. As a newly minted bitcoin bro myself, I would be interested if you did an article on bitcoin specifically. I heard about it years ago and dismissed it but never took much time to learn about it. Over the last year I have spent a lot of time learning about bitcoin and it is now a significant percent of my investments and I feel confident holding it for the next several years.

    Reply
    • Mr. Money Mustache January 11, 2022, 8:32 pm

      I do in fact have an article on Bitcoin!

      https://www.mrmoneymustache.com/2018/01/02/why-bitcoin-is-stupid/

      Those phrases you cite, about the “invisible tax/theft, the money is going to the politicians and bankers, Bitcoin is the solution” is repeated over and over like Bible passages by the Bitcoin Faithful.

      The thing is, even if the allegations were true (which I posit they are not, based on the incredible growth of the world economy and its success in improving human wellbeing over time using our existing currencies) Bitcoin does not address or solve *any* of those things!

      It is a *data structure*, one of thousands of competitors, many of which are technically far superior than Bitcoin, that people spend lots of time and electricity forwarding back and forth between their computers. The only reason people are really excited about it, is that speculative excitement has driven up the price, making people think it is some sort of brilliant investment. They are simply hoping for even more future price increases.

      But because this alone would be too transparent and shallow of a reason for such mania, these god-like characteristics are also attributed to the holy Bitcoin data structure, with beliefs about how it will save us from the evil central monetary authorities.

      I for one would prefer to have a roomful of stuffy 60-year-old PhD economists and businesspeople at the helm of the central banking system, rather than a global band of excited speculators who are more excited about increases in the price of the coins than they are about transaction speed, international government acceptance, and kWh per transaction and stable purchasing power, all things that are the true measure of a useful currency.

      Blockchains can be useful, and digital currencies are also a great idea. But treating Bitcoin or other Crypto tokens themselves as an investment? Just a form of speculation.

      Reply
      • poorguy January 11, 2022, 11:53 pm

        Your comment about bitcoin bros reminds me of this article i read last year

        https://www.citadel21.com/why-the-yuppie-elite-dismiss-bitcoin

        “The first hour or two of learning about Bitcoin triggers a multitude of scam red flags. For the business and financial elite, who have honed their heuristic abilities for filtering out the deluge of noise they sift through on a daily basis in order to be effective in their professions, these red flags are a non-starter. For their entire adult lives, they have been reinforced to think within the box (often while calling it “out of the box thinking”). “

        Reply
        • Austin H January 12, 2022, 11:44 am

          I read the article you linked. The takewaway I got from the article was that “Yuppie Elites” dismiss Bitcoin because all of their circle of influence does because they have a pre-existing high level of trust in the system. Time will tell which side is right.

          Reply
      • Casey Anderson January 12, 2022, 11:42 am

        Thanks for the link to the bitcoin article. Now that I read it again it is familiar. I think I read it back in 2018 but forgot. I see bitcoin as a digital asset that will hold value over long periods of time and as a way to transfer money internationally. I agree it is not great as a currency because it is so volatile. Dollars are a better currency to use for daily transactions but I think bitcoin will be successful alongside dollars, not as a replacement for dollars.

        The value of bitcoin is not as obvious in the US where inflation is usually 2%, but in other countries where inflation is much higher and people don’t have the option to invest in stocks, the benefits of bitcoin are more apparent. Here is a good article with examples of people in other countries adopting bitcoin: https://bitcoinmagazine.com/culture/check-your-financial-privilege

        I know you have already thought about bitcoin a lot and this article probably won’t change your mind, but just keep an open mind that maybe bitcoin does have some real value for people beyond just a speculative computer science data structure. I was also vehemently against bitcoin for years and would have agreed with everything you said in your bitcoin article in 2018, but I have since changed my mind and think bitcoin is an important invention. Since you mentioned your credibility as a computer engineer in that article, I will mention that I am a computer engineer as well.

        P.S. I have just reached early retirement at 30 and I wanted to say thanks for the inspiration to work towards this goal. I remember coming across your articles senior year of college and having a light bulb moment realizing that this was possible. My last day is in 2 weeks!

        Reply
    • Chris B January 12, 2022, 12:18 pm

      Ask what would happen if we engineered the USD inflation rate to be 0%, or if the government stopped creating dollars altogether (two very different things).

      If government policy was 0% inflation, interest rates would need to be a couple percent higher than otherwise, which means less economic activity, less employment, and nobody ever gets a raise. Additionally, a lot of the dollars that are today productively employed as loans to businesses and governments would be inclined to sit in unproductive savings accounts or safes. People would lack incentive to spend – which would be a good thing from a retirement savings point of view, but a bad thing for companies and workers trying to sell things. Japan inadvertently set a 0% inflation policy a couple of decades ago, and it went very badly.

      If the treasury decided to stop printing dollars and said X trillion is the maximum we will ever print, dollars would steadily leak out of the US economy. Each shipping container or bulk carrier ship would represent dollars exiting the US economy and going overseas to a merchant account and/or government ledger. If India wants to buy some oil from Malaysia, they’ll first trade for dollars in the forex market, and then give the dollars to the Malaysians, and thus they would utilize dollars obtained from the US domestic economy. Within the US, a dollar shortage would occur, leading to deflation, which leads to Great Depressions.

      Crypto is supposed to offer a way out of these constraints because it is not actually used for trade in the economy and can – in theory – deflate forever without affecting anybody’s economy and causing them to restrict monetary velocity with higher interest rates and whatnot. However, because it lacks inflationary expectations, nobody wants to spend their crypto. Thus it never becomes a currency, it remains a collectible / investment craze. I.e. Original Beanie Babies are becoming more rare by the day too. With the use case (currency) never realized, the case to buy currency depends on greater-fool investment theory.

      Reply
  • Michael Lamattina January 11, 2022, 3:01 pm

    Great article MMM! I would even like to expound further on the idea of Personal Rate of Inflation. Inflation numbers are given as the combined total of everything in the Consumer Price Index monthly and depending on what it is you purchase, your personal rate of inflation differs. For example, meat are up on an average of 16% from last November, but rice is only up 1.1% and potatoes are down 0.2%!

    The greatest inflation numbers lie in travel and energy. If you took a vacation last month, your flight was down 3.7% however your hotel was increased 22.2% and your rental car was increased 37.2% (with an additional 58.1% in gasoline)

    My advice to everyone would be to take advantage of all the data in the report (it’s monthly and is freely accessible at http://www.bls.gov/cpi and look for the dips for opportunistic purchases and you might not experience any inflation at all

    Thanks,
    Michael Lamattina

    Reply
    • Mr. Money Mustache January 11, 2022, 6:58 pm

      Great examples and tips Michael, thanks for sharing!

      Reply
    • peter January 12, 2022, 9:32 pm

      Hi Michael, Thanks for this web site.

      Reply
  • Lin January 11, 2022, 3:06 pm

    You completely gloss over the reality for retirees who don’t have big investments to tap into. They are struggling to get by on Social Security, which did have a nice COLA this year but that was eaten up by the increasing cost of Medicare premiums. As the value of one’s home rises, so do property taxes (25% here two years ago, 15% last year) and homeowner’s insurance. Water/sewer rates have gone up and are scheduled to go up 8% per year for several years right here in your home town. Electric rates going up. Natural gas is way up. So yes, for those who have investments, things look fine but it’s darn scary for anyone who doesn’t. Those of us who lived through inflation in the 70s and 80s are not so glib about the prospects for the future.

    Reply
  • Ross Williams January 11, 2022, 3:06 pm

    There seems to be an assumption in the comments that asset market values will keep up with inflation. That is not necessarily true. The 1970’s had both high inflation and stagnant stock prices.

    There are good reasons to expect stock valuations will fall and they highlight some of the problems with inflation:

    1) The stock market operates on supply and demand. When there are lots of people with money to spend on investments, prices go up. When those same people have less to spend, prices go down.

    2) Wages tend to lag inflation. So as it costs more for people to live, they will have less to spend on stock.

    3) There was a huge influx of cash into the economy as part of the covid inspired stimulus. For people on the margins who lost their job, that money got spent on necessities. Those of us who were still working, had money in the bank and were sitting at home had less to spend money on and reduces expenses.So we bought stock with that new cashflow, pushing up stock prices.

    4) The second half of the baby boom generation is going to go from desperately trying to invest more for their retirement to taking money out of their investments to cover their increasing living costs. As they move from consistent buyers to consistent sellers, you can expect prices of stock to fall accordingly.

    5) The fundamental problem is that high inflation does not spur economic growth but inhibits it. Higher prices mean people can buy less which reduces revenues and makes money for investment less valuable. In other words, someone whose paycheck is the same is spending the same amount of money for less stuff. That means some business is producing less stuff, there is no demand for producing more stuff and the capital needed to produce more stuff is less valuable.

    6) Stock prices can be expected to drop in half eventually. They always have. For people who can wait it out, the prices will go back up again in the long run. But, as the saying goes, in the long run we are all dead. That cliche has a different meaning when you are 70 than when you are 30 which is why retired people are often portrayed as uniquely vulnerable to inflation.

    Reply
    • CapitalistRoader January 11, 2022, 4:05 pm

      Real asset values tend keep up with inflation. Real assets are things like real estate and precious metals, things that have stand-alone intrinsic value. Also natural resources like oil and gas. Stocks and bonds are financial – not real – assets. They have no intrinsic value of their own.

      Reply
      • Mark January 13, 2022, 2:09 pm

        I think you’re overly pessimistic regarding owning stock and overly sanguine about commodities and real estate.

        Firstly, owning a share of stock in a company is a real asset. It may not FEEL as real as owning a piece of land or bar of gold, but it is a very real asset nonetheless. Owning a share of stock is an ownership share in a company’s equity and the right to receive an ongoing share of its profits. That company owns “real” assets like buildings, equipment, vehicles and other “intangible” assets like patents and intellectual property. By extension, because you own a share, you own these assets as well. There is rarity too: there are only so many shares to go around, and those who own shares have an interest in making them more rare (see share buybacks).

        As inflation increases, the value of the company’s “real” assets also increases. Its nominal (but not necessarily real) revenues also increase as price increases are passed on to consumers. Protection against inflation is intrinsically baked into stock ownership. And if a company is able to hold its wages steady while prices increase, that makes the shares all the more valuable.

        Even in periods of high inflation (and we are NOT certain this will persist once the supply constraint issues are relieved), the broad stock market as at least kept pace with inflation. That’s a heck of a lot better for capital preservation than holding cash or bonds. And over the long, long term, the real (i.e. inflation adjusted) return of the broad stock market has been ~8.1% per year since 1871.

        Commodities will always have an upside cap on price: higher prices –> more investment, innovation, substitution and other factors which bring prices back down (see “peak oil” from a decade ago). Picking a winning commodity in advance and then selling out at the right time is just gambling (and the tax treatment after you sell just sucks – see gold and other collectibles).

        Reply
  • The Estranged Yooper January 11, 2022, 3:25 pm

    I think this may have been the best essay that I’ve seen Mr Money Mustache do. He went back to the basics. Like so many issues in contemporary life there are people who adroitly blow smoke around the core of each issue leaving us confused. He isn’t one of them.

    I was going to write more, but it would have been one of those smoke examples.

    Thanks for the article. So good to see something positive!

    Reply
  • Johnny Mustache January 11, 2022, 3:27 pm

    Well reasoned article, MMM. I feel like you’re missing just one term, in one sentence: “The magic of [free-market] economics is that in the long run, prices for almost anything compete themselves all the way down to the point where it is barely profitable to make a product.”

    Reply
  • No More Weekdays January 11, 2022, 3:38 pm

    Great post. I’ve noticed inflation primarily in energy and food but I’m not too worried about it personally.

    For people shopping for houses or used cars or without much wiggle room in their budgets I could see the current situation being more concerning to them.

    As always though, I appreciate the “zoom out” long term view that puts things in perspective.

    Reply
  • Walter January 11, 2022, 3:40 pm

    The implied housing vs bananas comparison is interesting, but the ability to increase the housing supply in many areas is actively suppressed by NIMBY home owners who are enthusiastic about stopping development. I have a friend here in Colorado who voted against a measure to allow a relatively dense housing development with a “take it somewhere else” justification. Especially after living in the bay area for a short time, I have this sense that natural economic corrections don’t apply to the housing market.

    Is there already an MMM article on this?

    Reply
  • Akir Nakesh January 11, 2022, 5:15 pm

    Hey MMM!

    Is Understanding Economics still your favorite economics 101 book for someone looking to understand this sort of stuff and monetary policy and philosophy better? I know you read a ton but haven’t posted book reviews for some time.

    BTW something to pass onto your son who likes Kerbal, my pandemic hobby has been a game called Digital Combat Simulator, a flight simulator with clicky cockpit switches and very detailed physics. The e-store planes are pretty expensive, but there are some really good free community mod options.

    Col Akir Nakesh

    Reply
  • tt January 11, 2022, 6:03 pm

    Inflation hurts the working poor especially hard. The advice to just ask for a raise and shop for another job applies to most of this blog’s readership, but doesn’t work systemwide. It’s very difficult to get a good-paying job, and the whole point of technology/productivity is to destroy jobs (or at least hobble them to lower wages for less-skilled labor). One equation that people don’t like to acknowledge is that in an economy or any economic sector, number of jobs (or $ earned by labor) = demand / productivity. Increasing productivity (without increasing demand) DECREASES employment or labor earnings. It has recently been mostly true that increasing demand has made increasing productivity not too bad (systemwide), but as automation eats into cashiering, driving, and less-creative roles in engineering/accounting/finance/law/medicine, it’s not a given that we’ll be fine. We’ve seen our employment rate drop to below 50% during pandemic, and some of this is due to aging boomer demographics, but I don’t know what to advise people who are unemployed because they’re part of the 45-50% of us (and growing!) who are simply not needed to keep the economy going.

    Reply
    • Mr. Money Mustache January 11, 2022, 8:02 pm

      In general I think you’re right about the working poor and inflation, which is why I think minimum should be aggressively indexed to CPI and increase every single year.

      In the current cycle, labor is so tight in most areas that the demand is driving wages up naturally. McDonalds and Target in my town are offering $18 starting wages, which even at less than full-time adds up to more than my entire annual spending! And I view this as a great thing.

      As for technology destroying jobs and driving down wages – it does in some cases, but remember that this argument has been made passionately since the first steam-powered loom fired up in England, and yet employment and wages have risen ever since. At *some* point, artificial intelligence and robotics may start to truly outpace the economy’s ability to require human services, and as that happens I am a big fan of Universal Basic Income phasing in. And then we’ll finally have that Star-trek Utopia we all fantasize about :-)

      Reply
      • Jessie January 12, 2022, 10:37 am

        Speaking of your annual spending, I’d love a post on that!

        Reply
        • John Norris January 12, 2022, 12:52 pm

          Just produced my annual spend See:

          https://photos.app.goo.gl/oXhe3fAKxL9KVPZE8

          Hopefully we’ll see MMM’s soon!

          Reply
          • John Norris January 12, 2022, 12:57 pm

            PS Edit: I live in the UK, FIREd 6 years ago at age 57. Health insurance is zero because medical care is free here (at the point of consumption). My income tax is zero because my income is below the £12.5k ($17k) tax threshold. My household is one person – me :)

            Reply
      • Andy January 12, 2022, 2:06 pm

        If the pandemic taught us anything, it’s that the basic income experiment can lead to stagnation of thought and effort. The future of innovation just absolutely cannot solely come from the billionaire class. If it does, we could be beholden more than we are even now to Amazon/Walmart/Pfizer/Facebook.
        The regular people need motivation – I just hope that is not lost with a universal income.

        Reply
        • DuckReconMajor January 13, 2022, 8:31 am

          “If the pandemic taught us anything, it’s that the basic income experiment can lead to stagnation of thought and effort”
          Where did you see this? Because some businesses are having trouble finding people to underpay? Also it’s been less than a year did you expect flying cars to be everywhere overnight because of a stimulus check?
          You are 100% correct that innovation cannot come solely from the billionaire class.
          But if they are able to innovate without staring down the barrel of poverty what makes you think it’s any different for the billions of non-billionaires?

          Reply
  • GingerMustache January 11, 2022, 9:05 pm

    We built an eco-friendly duplex during the pandemic in the midst of rising prices and our costs exceeded our budget so that was unfortunate; however, our interest rate on our line of credit was insanely low and the increase in rental prices meant that we got even more money in rents than we were expecting.

    Reply
  • brewersarcade January 11, 2022, 9:18 pm

    Just wanted to say thank you. These articles are often the kick in the ass reminder I often need. Off to go charge up my Tesla in the morning for free at my work! Took a long time to get here. Don’t worry the mortgage is paid off. Thanks for all the help and advice.

    Reply
  • George Choy January 11, 2022, 10:57 pm

    Thanks for this really interesting article. We tend to naturally change our spending to take care of inflation. Thanks partly to your Vlog, we have consumed less over the years – despite becoming FF about 5 years ago now. We moved to be walkable to schools, work from home so drive less and less. We are Vegan and food shop according to season. We buy second hand when we can (which is also far better for the environment as you say).

    All this gives us an amazing, happy life knowing we are making less of an impact.

    On the other side of the coin our property portfolio and shares have gone up hugely in the past couple of years. Our mortgages have gone down in relative terms so our net worth is increasing too. Thanks very much for your sensible and valuable advice.

    Could you do an article on the relative merits of selling an older diesel car and buying an electric one if you don’t drive more that 10K miles a year?

    Reply
    • Chris January 13, 2022, 6:24 am

      George – My family and I got tired of sucking diesel fumes whenever I backed my (50 mpg) car out of the driveway. Going electric was a purely non-money decision, and I have zero regrets. It sounds like you have enough money to make a decision based on actual value, not just dollars. Do it!

      Reply
  • Pascal Zontrop January 12, 2022, 1:38 am

    Inflation has changed my mind a bit. I was all out on index funds but now I am heavily looking to buy a property that I can rent out. It was always on my bucket list but I am a bit scared now that loan rates will soon rise and I do want to leverage this purchase as I do not want to sell my stocks. I guess rent will also rise with it but this seems like an ideal time to step into the real estate market (besides owning my own house)

    Reply
  • FinHacker January 12, 2022, 1:40 am

    I really like how you think about personal view of inflation (PWoI ;-)…

    “Since consumer prices are only up about 6%, in reality everything should now feel about twelve percent cheaper to me today than it did even after this record year of inflation!”

    Very accurate. I feel the same way.

    Reply
  • Barbaneros January 12, 2022, 2:01 am

    Hey MMM,
    your article makes me smile when I think about how often I explained these mechanics to my grandma. She likes to rage about how cheap things were in the past. And I keep telling her that you have to work less hours to pay for almost everything compared to the 1960s! Keep the good stuff coming!

    But I disgress – the main reason of my comment is to give you a BIG HEARTFUL THANK YOU!

    The sentence seems overused but: You changed my life for the better.

    When I discovered your blog, everything started to make much more sense.
    My now-wife and I have always been conscious with money, living the good life for less money than everyone around us. Your words helped us align and streamline our habits, actions and investments and we are now on fast-track to FI in Germany.
    In 2021, we worked two full-time-jobs and a side business. We created a garden and a garage with our own hands, got married and hosted a big great wedding party in said garden and garage for 60 people – all while getting more rich, more physically fit and more grateful than ever!
    I started giving free community college courses about ETF-investing to help others lose their fear from the stock market. I also spread the word and more and more of my friends make the leap, invest their previously idle money and/or use their bike for commuting.
    There is still plenty of potential for us to improve and to become more badass, and I am looking forward to every single step. All I want to say is: you make a difference. We are grateful for our life and help others improve their situations. Your words gave us the confidence to take action and now we are scaringly close to leaving our jobs, in order to pursue more meaningful projects: our truly loved side business and raising children that will contribute to, rather than consume our shared planet.

    Reply
    • Mr. Money Mustache January 12, 2022, 8:30 am

      That is so touching Barbaneros… thank you for sharing that and so many congratulations to you and your family. Perhaps someday you can give me the inside lessons on Mustachian life in Germany first-hand!

      Reply
  • Ian January 12, 2022, 4:39 am

    Fellow Canadian Jeff Booth had a brilliant talk on this very subject in 2020. His thesis is that an inflationary-oriented economy drives consumption and a deflationary-oriented economy drives conservation and saving. He is very well spoken on this subject and has a fresh perspective.

    Sources:
    Jeff Booth on Deflation Vs Inflation https://youtu.be/0Q9_-WDhpoQ?t=218
    Canadian House of Commons Meeting with Jeff Booth https://www.youtube.com/watch?v=3D-d2lAT5uQ

    Reply
  • Robert Delorme January 12, 2022, 4:48 am

    Pete, you are a sobering man! Your writings are over the top easy to read and understand. I will never forget your post after the crash of March 2020, put so many of your readers at ease. This post is no different, you just have a common sense way of explaining things that an everyday Mustachians can absorb. Thank you bro!

    PS. Retired now for 3 years at 55, every single day is a day off and I take advantage of every moment.

    Reply
  • John January 12, 2022, 4:51 am

    I appreciate you so much. Thanks for the great perspective.

    Reply
  • Dan H January 12, 2022, 5:44 am

    I have noticed inflation has come up in a lot of conversation with people who generally speak very little about the economy. As you mentioned, inflation has been so low the last so many years that people sort of forgot about it until now.

    The biggest concern that I have is that the total supply of USD has doubled since 2020. It just “feels” wrong, but I’m not an economist so I have no business saying how good or bad that is. And although I do have inflation concerns, I’ve honestly done nothing different except substitute expensive products (which most of us here probably do quite naturally).

    Great post though. Thanks for keeping us cool in yet another weird year 🙂

    Reply
  • Aaron Hemry January 12, 2022, 5:47 am

    Thanks for the great article.
    As always, it pays to control what we can in our lives and remain flexible in relation to events and situations beyond our control.
    Inflation?

    Living a Mustachian lifestyle is the essence of this and allows us to create an economic buffer zone for our lives. Inflation hurts us when we live on the edge of not being able to afford our lifestyle already.

    I’d also like to add that the “buy and hold” strategy can be used to our advantage (not just in stocks, which I don’t own, but in terms of jobs, consumer items as well as productive assets)

    I started my contracting business 24 years ago and as my wife got better and better with managing the kids and house, I got better and better with supplying my young family of six with ever increasing amounts of income as I acquired more tools, knowledge and contacts to grow my business.
    If I jumped around in careers I’d likely lose some of that advantage each time. I love my job and am in the position now financially where I only take on the jobs I’d do even if no one was paying me.
    Inflation?

    I don’t care what a new saw costs. I have a perfectly working ten year old one that gets more financially beneficial every time I use it.
    Which leads me to consumer items: who cares what these new things cost? If you’re old or middle aged you should own it already and not need a new one.

    If you’re just starting out, buy a good new one and hold onto it. Or alternatively, buy used or take advantage of good free stuff given away by someone else. My oldest son was able to score a kitchen worth of great used appliances by scouting out deals and freebies on Craigslist and Facebook marketplace.
    Inflation?

    And lastly, productive assets…my rule is…if it’s price is high because of speculation, don’t buy it. If it’s high, low or in between because it’s producing and you expect it to keep producing, go ahead and buy it because the price disadvantage of buying an inflated asset will balance out over time thanks to it’s productivity.
    Ten years ago, I tried to buy the gas and oil well that gives us free gas to our country home. I was willing to pay the asking price of $7500 for it as I saw value and never plan to move. The owner decided not to sell until last year when prices were down, when I got it for $3500 after receiving free gas for the nine years. Inflation?

    A final note if you are worried about inflation: sledgehammer the TV and go for a walk in the woods. Trees get bigger every year unless you cut them down.
    Inflation?

    Reply
    • Mr. Money Mustache January 12, 2022, 8:23 am

      WOW, thank you for this amazing comment Aaron!

      Damn, I should have just asked you to write this blog post for me. Maybe some future time. I especially enjoyed your analogy about the trees.

      Reply
  • Andrew January 12, 2022, 5:49 am

    Great article. Inflation is good for borrowers, neutral for investors, and it’s only bad for people who are either holding cash…
    That’s my case, I’m still holding 60% cash since 2016 waiting for the market to come down for me to buy…and I will keep waiting…I didn’t make this far to give up now.

    Reply
    • Mr. Money Mustache January 12, 2022, 8:19 am

      Hahaha Andrew, I hope your comment is a bold bit of dry sarcasm of what NOT to do?

      Surely anyone trying to out-guess the stock market would have at LEAST bought in during the amazing 40% off sale during the 2020 Covid Crash??

      (For the record, I am still piling 100% of my savings straight into index funds like Vanguard’s VTI every week, not trying to time the future crashes but thankful for those rare times that they come. In the long run, the stock market is simply a measure of the sum of humanity’s efforts, which are cumulative. Thus it always goes UP)

      Reply
      • Andrew January 12, 2022, 11:09 am

        I whish it was sarcasm but it’s true and believe me I’ve read so much (including The simple path) about going all in on the stock market but I just can’t. The way I earn my money is so hard that I can’t stand seeing it drop even $1 or I won’t sleep at night. I’ve tried just to pull everything out in Dec 2018 during that crash.
        For someone like me things aren’t easy at all…missing a lot because of my market psychoses

        Reply
        • Arshizz January 12, 2022, 1:02 pm

          Hi Andrew,

          This is why someone like you needs to forget about stock market and stick to real estate. Real estate doesn’t fluctuate like this. Plus you can’t just get in and out of it that easily so your money stays longer in it. Also if your down-payment is large enough then you’re collecting more rent than expense and every year it’ll be even more profitable because your mortgage will be decreasing. Real estate will be much easier on you mentally.

          You are the biggest danger to yourself in stock market. Stick to real estate.

          Reply
        • Chris B January 12, 2022, 1:48 pm

          Well, at least you aren’t jumping into the market on every upswing and out of the market on every downswing. That said, your market anxiety has been costing you big time. Worst of all, even if the drop to 2016 levels occurred, you’d be too anxious to take advantage (oh wait, it did occur in 2020 actually). You’ve got to fix this.

          Here’s a little secret. The market price of everyday things rises and falls by a large amount each day. If you own a house or a car, you might get 10% more if you auctioned it on Wed. rather than Thurs, or vice versa. It’s impossible to know. The computer or phone you’re typing on has 10% +/- swings daily in the value you could get selling it on the street. Your clothes, etc. every asset you own fluctuates in price every day. That’s why retail stores, car lots, and realtors normally keep an inventory – it’s all waiting to sell at a peak in the value.

          Stated another way, the amount of stuff your dollars can buy changes from day to day as things go on sale and off sale. So as measured in stuff and services that can be bought, the value of cash changes.

          If there is any anchor on the concept of value that makes it different than “whatever people are willing to pay today” then it would have to be “what it’s worth to you”. But even the subjective value of a thing changes as your needs come and go.

          I suggest reading A Random Walk Down Wall Street, a classic for stock investors.

          Reply
    • Alex January 12, 2022, 10:48 am

      Yikes, hope you’re kidding… The S&P was like 2,000 in 2016 and is almost 5,000 now. It would have to crash 60% to just get back there. If you misestimated the peak that badly, you’re not likely to time the bottom well, especially if the next crash is only 40% and you’re waiting for 60% that never comes. If you’re really worried about investing into the next crash, and need to get over that psychological hurdle, just spread it out a bit, like 5% per month. Not mathematically optimal, but much better than holding cash.

      Reply
  • Simon January 12, 2022, 6:26 am

    I love MMM’s optimistic, chill out takes on the economy, but have to disagree with him on a few points (just my opinions) the government’s CPI is BS, yes 6% is high but the way they measure it is manipulated to make it appear lower than it is, I’ve read from more than 1 source if they kept the same measure as the early 80’s it would be at 14%+ right now. Yes inflation isn’t so bad if you already own a house or scarce assets, but what about the many that don’t, I’m from Australia and we are witnessing a whole generation being priced out of the property market that has seen insane gains especially since covid and wages are mostly stagnant, not even close to keeping up with inflation.

    Reply
    • Mr. Money Mustache January 12, 2022, 8:13 am

      Yeah, I’ve seen that argument of “The CPI is rigged” argument since the very beginning of my interest in this subject in the late 1990s, but it still doesn’t ring true to me. For example, critics argue against the “hedonic adjustments” which try to adjust for the improvement in quality of the goods, but these are real and important effects.

      For example, if the cost has risen to $100 to take the family out to the movie theater, but I can literally *OWN* a 60″ 4k movie theater in my own living room for just $400 now, my family really is better off – we can enjoy the net good (time together watching highly engrossing movies) far more often for far lower costs.

      In fact, I think the opposite of CPI-rigging is true: the Consumer Price Index is overly pessimistic. As I said in this article, things which involve paying highly skilled professionals in regulated industries (medicine, university tuition, etc) are indeed rising faster than CPI. But these services are increasingly obsolete, because technology has opened the door to the underlying benefits (self-education in ALL fields) and made them virtually free.

      Even cars, fuel and transportation: who was predicting in 2008 when gas prices tripled, that there would soon be a complete workaround to fast city transportation even for non-athletes (ebikes and scooters) that costs only about $1500, requires no license, registration, insurance, and fuel is free?

      When people were dreading “peak oil” in 2011, who would have guessed that you could power an entire family’s energy needs forever (including car driving!) with a sheet of solar panels no bigger than a parking space that costs about $4000?

      There are definitely some pockets of the economy that don’t follow this rule. But in general, I’ve seen standards (and FUN!) continuing to rise, even while my cost of living drops.

      Reply
      • Samantha Cook January 17, 2022, 11:03 am

        Hi MMM
        Great post above and also welcome insights about the CPI. Speaking of said CPI, I’ve been noodling around with FIRECALC lately and was wondering – do you think that it’s a good idea to stick with the CPI setting for inflation, on that calculator, or to try various fixed inflation percentages?
        Thanks!

        Reply
  • Brad January 12, 2022, 6:29 am

    Another great post. Thanks. This was a really well distilled Econ 101 lesson that anyone can understand. A takeaway that I have not seen yet in the comments is stuffing your mattress with dollar bills pretty much locks in a 90% or greater loss to your “wealth” over your lifetime. We should all be very conscious about having bloated “emergency funds” as this seems to be a real stewardship mistake with our resources. Dollar bills are a function of liquidity. That meaning you use them to buy stuff, not a store of wealth. Keep up the great work.

    Reply
  • ThermonuclearPlatypus January 12, 2022, 6:29 am

    I think about the inflation the same way. My assets are stocks, house and things I’m using. Nit FIAT money. So unless hyperinflation starts, I don’t care.

    But I can’t agree, that being healthy is cheaper and easier than ever. Because it depends on person’s actions just partially. For example myself – I did everything about right. I haven’t ever exercised, but I have cycled to work, walked to shop, worked on my garden, car and other projects (although with electric tools, not just with muscle powered ones). I had lots of physical activity. I had even the medical insurance (everyone here in Europe has) and I’m living in state with very good medical care. Then I have catched something like flu. And I had that for half an year.

    Doctors has found nothing. Now I live for three years with chronic fatique syndrome. I’m unable to walk anywhere. I’m unable to cycle. I’m unable to use public transport (too much walking). I’m trying to do some of my hobbies still and I can work for a few tens of minutes until I need to rest.

    Luckily I have started to invest, when I have found this web, (thank you MMM for explaining me, that investing in stock isn’t a zero sum game) and I’m very frugal, so I’m O.K., but definitely not healthy :-(.

    Reply
    • Fisher May 19, 2022, 10:20 am

      It could be TMS. There are a lot of resources online about the topic such as TMSwiki , Dr Schubiner and others.

      Reply
  • delabrun1 January 12, 2022, 6:32 am

    Being from (and living in) a country chronically affected by high inflation rates (4.5% central bank target, 10%+ last year actual), I believe I can contribute with my two cents.

    The first world long-term Mustachian is already enriched by the recent years humongous growth in asset values and has savings rates comfortable enough to not worry at all. That said, The US and most first world countries aren’t used at all to those sudden price hikes, and as such, have no tools to protect its lower class workers against it (such as annual wage rises). The Mustachian middle-to-upper-class American may go through this period without suffering a lot, but uneducated workers may not recover totally from it. Furthermore, the middle class workers that don’t have a safety cushion already built can also suffer.

    On a closing note: these high inflation rates in the developed world surely won’t last longer than two or three years, so the average mustachian has nothing to worry.

    Reply

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