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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?

  • Troy January 12, 2022, 7:46 am

    Hey MMM, really appreciate this timely article. It’s got your patented dose of unrelenting optimism with data to back it up.

    My question is more of a hypothetical one, curious as to your thoughts.

    So hyper inflation is of course possible, it has happened in other countries (Venezuela/Sudan/Argentina), what do you think would have to happen for the same thing to happen in the US?

    Would it be purely down to over printing of money, or rather the US dollar losing its “reserve currency” designation, or some other combo of factors?

    Reply
    • Laura Sonnier January 16, 2022, 9:46 am

      Yes! I’m very interested in your opinion on this as well.

      Reply
  • Dale Roberts January 12, 2022, 9:27 am

    Inflation might not matter for an investor early in the accumulation stage, with decades to go. But inflation is a serious concern for the retired or those within the retirement risk zone.

    If we look at stagflation, that crippled many investors, and especially retires. Stocks were no defense. Not even our more inflation-friendly Canadian stock market.

    Stocks don’t like unexpected inflation or stagflation.

    Fortunately for investors, after the stagflation period we’ve mostly seen a disinflationary, low growth environment. That’s when stocks and bonds typically do well. And that’s all today’s investor knows and understands.

    Most retirees and near retirees would not be prepared for rampant inflation or stagflation. What works is commodities, commodity stocks, and other types of stocks such as consumer staples and industrials, tech (at times) and REITs.

    That is why the knowledgeable self-directed investor who builds portfolios of individual stocks and ETF has an advantage over the investor who buys the market.

    You can also bolt on some inflation protection to an index based approach.

    Reply
  • old_eyes January 12, 2022, 9:58 am

    A thoughtful post and a corrective to much of the frantic commentary both on quantitative easing and inflation. For those of us like me in the UK who remember the bank base rate spiking to 15% in 1981 – just after I have bought my first house and with fixed rate mortgages unknown/unavailable – we are nowhere near the same territory.

    However, government policy and sector differentials can lead to inflation being more noticeable in some areas.

    In the UK 1/3 of the workforce are classified as public sector. After the 2008 crash the UK Governments enacted wage freezes and strict limits on increases that were below the rate of inflation. This has only recently been relaxed, and you can argue that it is still in force.

    2008 – pay settlements up to 1% only. No increase for senior staff
    2010-2012 – 2-year pay freeze for anyone earning over £21k
    2013-2017 – Average 1% increase in pay bill for any public sector employer (so a bit of flexibility about where you spent it).
    2018-2020 – no explicit policy, but money tight
    2020-2021 – pay freeze.

    (https://researchbriefings.files.parliament.uk/documents/CBP-8037/CBP-8037.pdf)

    Net result – public sector workers have lower income in real terms than in 2007.

    Examples – salaries for experienced teachers now 8% lower than in 2007, and pay for NHS dentists fell by 32% between 2006−07 and 2017−18.

    This is not to say there have not been squeezes in the private sector, but it has not been a matter of policy.

    Now you could argue that people are damned fools to work in the public sector if that is how they are treated, and many have left. But a) you never know for how long such wage suppression. can continue, and b) we need these people to keep the country running (especially during the pandemic).

    We are also going to be hit by a significant and sudden increase in energy prices in April (due to the particular way the energy market is regulated), and a significant (in recent terms) hike in taxation.

    For lots of people in the UK this will be a very difficult time, and it is not because they are feckless wasters, it is overwhelmingly because they are poor, not well educated, old, or living in the wrong part of the country.

    Reply
  • Adrián Pardini January 12, 2022, 10:00 am

    Incredible article and in a timely fashion.

    If you ever get bored in Longmont pretty please come to Argentina and give a clue to our leadership.

    Reply
  • steve poling January 12, 2022, 11:14 am

    I think a lot of complexity of elastic/inelastic pricing obscures the simplicity that paper money is not a stable store of value. If it moves around the economy faster, that matters & this source of complexity is also confusing. If they print more, it’s worth less. Gold is a stable store of value, but it is not a productive asset. Deflationary, portable stores of value, such as BTC are subject to technical and regulatory risk, but regulatory risk can be mitigated by relocating to a friendlier jurisdiction.

    You won’t retire on commodities unless you hoard so much you can’t spend it all in your lifetime. Merely storing value is a fool’s game (Jesus said so).

    Productive assets, like businesses seem good hedges against inflation b/c their underlying capital assets aren’t paper dollars but factories and equipment. Dollar denominated debt/contract assets, like bonds or annuities, unless they’re indexed to inflation, seem riskier. Since an individual company can go bankrupt, but an entire economy won’t, I’m thinking VTI/VTSAX is the safest asset to hold until sane monetary policy resumes.

    Reply
    • Fred January 12, 2022, 12:16 pm

      I could not agree more with this analysis. At the end of the day, productive assets should carry the lion’s share of investor’s return burden – because value is created through the ingenuity of people producing goods/services that others want/need. That’s why even though the dollar has lost 90% of its purchasing power over 100 years, we are all far better off in 2020 than we were in 1920.

      Reply
    • Steve Poling January 12, 2022, 12:30 pm

      If you think inflation is completely harmless, read “The Black Obelisk,” by Erich Maria Remarque. It illustrates which asset classes perform better or worse during a period of hyperinflation.

      Reply
  • Aron Boyette January 12, 2022, 11:26 am

    This article comes as cold comfort for the millions of Americans who are struggling to pay the rent or mortgage, put food on the table, and keep their jobs.
    Say that you’re out of touch without saying you’re out of touch: “my own net worth has gone up several hundred percent since officially ‘retiring’ in 2011”
    Say that you’ve never had to work hard for your money without saying you’ve never had to work hard for your money:
    “negotiate a raise and simultaneously start shopping for new jobs”
    Inflation forces us all to have to do these things. We shouldn’t have to.

    Having said that, there is some good advice in this blog. If anything inflation should be the warning light that we should be careful to live well within our means and save for the future. Because guess what: inflation isn’t going anywhere and the future is not going to be cheap.

    Reply
  • Ruth January 12, 2022, 1:18 pm

    I disagree. Since I’ve stopped reading the news, I don’t hear anything about inflation. I feel it, though. The charts and explanations are all well and good, but at the end of the pay cycle, we’re now $300 short and buying less. Back in the Carter Administration was another such hot mess. Yes, it’ll all even out eventually, but meanwhile people’s salary increases aren’t keeping pace.

    Good things are happening, but it’ll take some time. Meanwhile we continue to cut more.

    Reply
    • Bob Nelson January 12, 2022, 6:33 pm

      Inflation was well under way during the Nixon and Ford administrations (see “WIN” buttons for an example of how they thought it should be fought)! Carter was the one that started getting it under control when he appointed Paul Volcker as the Fed Chief. It was painful but it worked.

      Reply
  • Chris Brown January 12, 2022, 2:00 pm

    I recently read that all the scary inflation talk in the media is because the value of debt drops… and that doesn’t make overlords happy. Sounds logical to me.

    Reply
  • Ryan January 12, 2022, 3:34 pm

    One of the main complaints in my generation is the weight of student debt. With large amounts of debt and no means to discharge the debt in bankruptcy, many hope for student loan forgiveness. You’re entirely correct in stating that inflation helps borrowers, and this is true for both the mortgage holders in your example and for everyone with student debt. While the dollar amount owed remains fixed, your ability to repay the loan increases. The suspension of payments and interests on federal student loan payments is exactly the windfall that my peers hoped for.

    Reply
  • Bob Nelson January 12, 2022, 7:05 pm

    Things like gas prices can be very volatile and the 58% rise was from historically very low levels as prices dropped when people stopped driving as much at the start of the pandemic. But people adapt to those low prices rapidly and easily forget that we had $4-5/gallon gasoline in the mid 2000s before the Great Recession.

    Reply
  • Liesbet January 12, 2022, 9:22 pm

    I guess inflation hits us all differently. As nomads of almost two decades, 2021 was a tough year. We are not retired – we do seasonal work and freelance without ever getting a raise. But we have stocks and savings as well.

    When we drove across the country in our new-to-us truck camper last fall, we spent more on fuel than ever before and we needed new tires. In the past, my husband would keep an eye on the products that we needed for our lifestyle and buy them when there was a price drop on Amazon. As you mentioned, this didn’t happen at all in 2021.

    Facing all these extra costs made life hard for us, so my husband decided to take a seasonal job at a warehouse in Phoenix for the month of December (I earn money freelancing as a writer, translator, and author) to ease our expenses. We both have college degrees. Our motto of “if you spend less, you need to work less” was not working out last year.

    Anyway, long story short – he secured a night shift with Amazon for at least a month, but because of a delay with his background check due to the Thanksgiving holiday, his shift (and job, because once his shift needed to be rescheduled there were no more seasonal positions available) was cancelled! We’d made arrangements regarding time frames and a campground around this job!

    Luckily, he found a job at the Macy’s warehouse, also in the Phoenix area and was promised a seasonal position at least until February. Two weeks of night shifts in, around the 18th of December (and before Christmas!), Macy’s let all their seasonal workers go – there wasn’t enough work. Talk about a slap in the face and a complete bummer. So much for making that chunk of money we counted on. And it’s not because we don’t want to work!

    We realized then and there that the US is not our place anymore and that the only way we can keep affording our nomadic lifestyle is by leaving the country and spending our time in more affordable places.

    Reply
  • Bernard January 12, 2022, 9:53 pm

    A very nice article, and a voice of calm and reason.

    However, I don’t see any discussion on the pernicious effect of inflation on taxes. Many good FIRE followers invest in the stock market and depend in part on capital gains for their future income. Capital gains are taxed on a nominal basis — not a real basis.

    If we have a 7 percent nominal return this year, and 7 percent inflation, we would have zero real return. However, we’d still have to pay capital gains tax on this nominal increase in asset values when selling the investment, losing some of our principal to what is effectively just a tax on inflation.

    This will be good for the fiscal accounts, but quite bad for many ordinary investors.

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

      Yes, a very good point – I am a big proponent of everything being indexed to inflation every single year: tax brackets, public sector pay scales, and especially minimum wage.

      In recent years, we have seen such big income tax cuts in the US that we did in fact make up for lots of past inflation. But next year, I’m not expecting all the brackets to effortlessly rise another 7%. Luckily, taxes are already soooooo low in this country and there are so many legal ways to pay less if you actually care, that it’s not such a big issue at the moment.

      Reply
  • Asier January 13, 2022, 12:12 am

    Hey, thanks for taking time to write this blogpost.
    I recommend you to look into the “Cantillon effect”, inflation doesn’t impact everybody the same way.
    Also if you are into learning and economics I encourage to explore Austrian economics.

    Reply
  • jessica January 13, 2022, 1:49 am

    Always reassuring perspectives. I’m in supply chain, and there is definitely more inflation that has not come down the supply chain yet. But, the points you bring up are even more important to remember. 12% up! :) Thanks MMM. You da MMMan.

    Reply
  • jessica January 13, 2022, 2:00 am

    Trained economist in supply chain and retail here. Prices will keep going a lot farther up and we will continue to have shortages for a while if my observations are true. Prices for producers and importers are up like 10x in some areas. So, grab hold of those antifragile mustachian bootstraps and prepare to deflate while you can.
    Not all of us can. Small businesses die in the short term if they can’t keep pumping money in. People lose their homes.
    At least in any of those circumstances, mental toughness serves us well… I know that I can survive on half my current budget if I need to.
    If you still have the luxury to invest, keep doing it. (Buy fear, sell exuberance). Assets are king in an inflationary environment.
    Thanks MMM for a good dose of optimism and toughness!

    Reply
  • Bryan January 13, 2022, 5:18 am

    “Accept certain inalienable truths: prices will rise, politicians will philander, you too will get old– and when you do, you’ll fantasize that when you were young prices were reasonable, politicians were noble and children respected their elders…but trust me on the sunscreen.”

    Reply
  • Kashmani January 13, 2022, 7:04 am

    While I have always admired the consistent optimism of this blog, I certainly don’t feel protected in this inflationary environment. If anything, the economic situation right now feels more like a bare-knuckle street brawl.

    On the job side, I have a stable government job that was not affected by COVID, but our government legislated a wage freeze and aggressively litigated it all the way to the Court of Appeal, not giving an inch. In the end, after a protracted arbitration, we got 1% one year and 1.5% the next year, which is a quarter of inflation. Being at the top of the scale, the only step up would be a senior management position that is basically a 70-h work week for only $20k more per year. Not really worth it.

    On the house side, we made the decision years ago to give up and just raise our kids in an apartment-style condo since house prices are so high. Two years of of COVID orders, home schooling, “gatherings only on private outdoor property” orders (we had no outdoor property), and we just bought a house in 2021 after hitting the breaking point. It is nice and we love it, but it was expensive as hell. And we sold the condo for $15k less than we had bought it four a decade earlier, since condo prices went down in our area. And two days ago we got a letter from the City upping our assessment by $50k. So up go property taxes. And we needed to liquidate a bunch of investments to buy it, missing out on most of the 2021 grwoth.

    On the investment side, I keep second-guessing myself about using a balanced asset-allocation fund (VBAL), wondering what the heck will happen to bonds the next few years.

    Fifteen years of careful budgeting and Mustachianism means we are okay, but with salary growth realistically below inflation for a number of years, our margin of safety is definitely being eroded.

    Reply
    • Mr. Money Mustache January 13, 2022, 8:05 am

      Yikes! Thanks for sharing all of that Kashmani, that does indeed sound like exactly the type of stuff that frustrates me the most – bullshit rules and policies, imposed from the outside.

      I’m sure you worked through all the options with your family and decided that you were still in the least-bad situation. But at the same time, I always try to remind others (including myself) to push through the fear boundaries and make some of the hard changes more often.

      For example, it is often surprisingly easy to switch jobs if you just start putting the word out (to colleagues, friends, LinkedIn, etc), and most people do far better than expected with a new salary and a new role. Ideally, *everybody* should always have at least one eye out there for a better job throughout your career, otherwise you can easily become trapped and stagnant.

      It’s also decidedly FUN to move to a new city, region, or even an entirely new country in the right situation. We all fear that our kids won’t do well in the situation, but then envy the families that actually do it and wow, look how well the kids are doing after all. Again I am speaking for myself here.

      Finally, the whole Covid lockdown situation was very instructive to me. While everyone has different preferences, I personally looked back in complete HORROR at the way my former country of Canada handled it with a brutal and completely pointless wreck-everybody’s-lives strategy. Meanwhile, here in my part of Colorado things were much more balanced and human beings were able to continue socializing, which is absolutely critical to both mental and physical health. Thus, I will now be careful never to settle anywhere that did impose strong lockdowns in 2020, because it could happen again.

      Which is all to say: one of the very first articles on this blog is about moving!
      https://www.mrmoneymustache.com/2011/09/28/get-rich-with-moving-to-a-better-place/

      Reply
  • Olaf, the Mile High Finance Guy January 13, 2022, 11:39 am

    Thank you for the rational take and debunking of the mass hysteria that the news is driving around inflation, MMM!

    Personally, I am unconcerned with inflation, as we have lived through a period of minimal inflation for the past two decades and it was only to be expected due to the law of averages that we would experience a spike. Would I have guessed that COVID would have been that spike? No.

    Anyhow, while prices are rising, workers have more bargaining power now than they have in ages. So, if your employer won’t pay you more, take your valuable labor elsewhere.

    Reply
  • Fireby35 January 13, 2022, 12:19 pm

    Nine years of mustachianism means I’m riding smooth through many storms. Thank you for this blog :)

    Reply
  • JPB January 13, 2022, 5:45 pm

    Great article.
    Your article puts some very sound evidence around an issue that is causing a lot of anxiety out there.
    Thank you for taking the time to write this and keep up the blog posts.
    Much gratitude.

    Reply
  • Wanton January 13, 2022, 7:26 pm

    Hmmm… I might agree with this over the long run. But in the short to medium run, the Fed is caught between the scylla and charybdis. If they raise rates, the market and the everything bubble will crash. If they keep printing, inflation will take off further. There’s no way out, so be ready for the great financial crisis 2.0 on steroids. When the next crisis comes, the derivatives time bomb will likely explode and the Fed will be forced to paper over the damage. Meanwhile, the mighty greenback will lose reserve currency status in the coming years as the world’s geopolitical center of gravity shifts east. Westerners are in for a rude awakening, so be ready for some lean years ahead.

    Reply
    • Mr. Money Mustache January 14, 2022, 3:16 pm

      Just responding here so that I can take the other side of this bet and we can check back in five years. My own armchair economist prediction:

      – US interest rates will rise, which will slow the economic growth just as intended
      – There will be periodic financial “crises” just like there always are, which will cause exciting zig-zags on graphs
      – People will keep interacting, trading, inventing new things and working on them so both the economy and the stock market will recover with surprising speed as it always has.

      I do agree that China’s economy will soon exceed the size of the US. After all, they have quadruple our population and are industrializing rapidly.

      But since we are trade partners (even though grumpy ones at times), this will simply serve to increase the pace of innovation on both sides of the planet, since technology now flows back and forth at the rate of terabytes per second. It’s not a contest, the world economy is overall a giant collaboration with a net win/win for everyone the further along we get.

      Reply
      • BW January 19, 2022, 6:19 am

        The FED can’t really control inflation with the interest rate. It’s a clumsy mechanism and the effects can range from unpredictable to downright counterproductive.

        -Interest rates are a cost to business. To the extent they can, if costs goes up, business will raise prices.
        -Higher interest rates mean higher interest payments, that’s a boost to spending.
        -Banks borrow short term and lend long term. If you raise short term rates, banks need to continue lending at the new higher rate to maintain their spread.

        (Yes, if the FED raised rates really high they can eventually depress investment, but “reduce investment enough to trigger a recession” doesn’t seem like a particularly effective policy choice to me, nor do I think they are proposing that).

        My prediction is that the FED will raise rates, and people will make a huge deal out of it, but it actually won’t make that much difference (minor changes in interest rates don’t have a big of an effect on investment decisions).
        -Inflation will continue to be shaped by other factors like shipping and energy costs, and labor market. We’ve had depressed wage growth for decades and it shouldn’t be surprising that a lot of people are opting out right now. Wages need to come up (and more than prices do).

        Reply
  • wt January 14, 2022, 1:53 am

    You write: “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”

    That’s only true if there are enough natural resources. That was true for the past 300 years, but it’s no longer true today. The coming decades will see decreasing industrial production.

    Reply
    • Mr. Money Mustache January 14, 2022, 3:02 pm

      Well, that is certainly one theory – and it has had a certain core of believers since even before I was born in the 1970s.

      The most notable recent example of that was the “peak oil” movement, which seemed ominous and wise as recently as 2011, but is laughable today because we have engineered a complete end-run around the whole situation: oil will soon be a niche product, with most of its current uses (ground transportation and electricity generation) being replaced by far more efficient (and profitable!) renewable electricity.

      The thing that the shortage hypothesis neglects is Innovation. Right now, we are doing things in a destructive and natural-resource-intensive way simply because we are lazy, slow, and most people don’t know or care about environmental destruction. This is now changing, and this blog is just one project intended to help accelerate that shift.

      In the future, we can have much higher standards in the areas that count (health, happiness, human wellbeing, education and technological progress), while shrinking some parts of industry (building of unnecessary roads, disposable products including personal vehicles, etc) and growing others (energy generation, carbon removal, new faster forms of travel, useful robots and lots of other cool stuff). We are just at the START of the industrial revolution – as long as we can stop being idiots about it :-)

      Reply
  • David H January 14, 2022, 8:49 am

    I disagree about the cheeriness of the situation. With inflation last time came matching interest rates that helped provide average people offset the pain to savings. Back then USG debt was manageable whereas now, a matching interest rate to the inflation rate would cripple the debt spending which Amerika has become addicted. How would the market react to a massive budget cut? Trick question, there would be no budget cut. Fed would go brrrrr and other accounting tricks to keep spending. Think the lost decade in Japan but worse. Don’t even get me started on the erosion of the USD as reserve currency and the potential for central bank digital currency to upend the current system in favor of globally centralized economic planning.

    Reply
  • Guadalupe January 14, 2022, 4:14 pm

    Thank you for starting with the facts right from the start! There’s no debating a chart :)

    Inflation wouldn’t even be on my radar had I not kept hearing about it in the news or at work. I didn’t even think to question it since what I was spending six months ago is pretty much the same as it is today.

    After doing a little research, it makes sense that I haven’t been affected because inflation is not the same across the board. For example, I commute to work so I don’t have to pay for gas, gas is one category that has apparently seen a significant increase…but has it?

    Either way, a lot of people think they have something to worry about but they don’t. Inflation is normal and historically speaking, there’s always a period where’s it’s higher than normal.

    Reply
  • CG January 15, 2022, 7:03 am

    I’m a small business owner, and since the pandemic began, my hard costs for creating our products have increased by a cool 30% (permanently, not temporary price shifts like lumber). It’s true that those prices may eventually drop if another company comes into my town and invests millions of dollars into duplicating the specific infrastructure my company uses, but that’s years out, if not decades, and it’s going to take a long time to creep my prices up to match the hit I’m taking.

    I’m hearing similar increases from my other business owner friends, and I’m hoping that this doesn’t wipe out an entire generation of small product-based business owners. Single-digit inflation isn’t a huge deal for many people, particularly if they’re retired or more traditionally employed, but it’s much, MUCH higher than single-digit for folks in my shoes.

    None of this is a complaint, just sharing my particular experience since I know many small product-based businesses are going through a similar struggle. I could just walk away from my business and get employment elsewhere—no one is forcing me to run a company, obviously—but that wouldn’t change the fact that inflation is having a disproportionate impact on many smaller companies.

    Moral of the story: Shop small! We need you more than ever! :-)

    Reply
  • CaptainFI January 15, 2022, 10:15 pm

    Hi MMM firstly great article well written and backed up with solid facts and data as usual. One thing I would like to hear your consideration on is tax bracket creep due to inflation, ie if everything is going up on value it possibly bumps people up into higher tax brackets despite no change in ‘real wealth’ (for want of a better term). Just FYI I’m not against paying higher taxes but would be interesting to hear how this is fairly dealt with – although I suspect leans into politics and selling ‘tax cuts’. Cheers and happy new year

    Reply
  • Boo307 January 16, 2022, 12:38 pm

    Wonderful blog explaining inflation, and with links to the data! Thanks for asking for the experience of those of us who lived through stagflation decades ago.

    As a single mom in 1980 I bought a house by assuming the first mortgage at 8.5% and took a second mortgage at 14.5%. Of my $1,000 monthly income I had $450 after mortgage payment for; utilities, heat, food, etc. My luxury was to spend $10 a month for a tank of gas to visit the grandparents. The point is the unexpected happens; my life plan never included divorce with two toddlers. This also illustrates how inflation can really hurt folks starting out.

    As a 72 years old now, it becomes harder for me to manage my rental and securities portfolio each decade. Capacity does decline with age, hence ability to stay ahead of inflation. Very scary.

    The cost of living increases substantially even with moderate inflation. Since my husband retired in 1991, the CPI has averaged 2.4%, so he now needs $20,713.37 to buy what cost $10,000 in 30 years ago. I retired in 2007, the CPI has averaged 1.93%, so I need 30% more income to maintain my standard of living after 14 years. I am very concerned about the rate of inflation at double or triple these rates.

    Run your own CPI calculation. No one wants to repeat the 1970’s average CPI of 7.1% when the cost of living doubled from Jan 1970 to Dec 1979. https://www.bls.gov/data/inflation_calculator.htm

    It is time to rein in the politicians and to again vote out those who support spending more and more borrowed money. Let’s put back the political price tag, of the 1980’s and 1990’s, for big spending.

    Reply
  • Reformed Yuppie January 16, 2022, 9:58 pm

    This is brilliant MMM and something most people don’t get. In 1995 my parents bought me some Nike’s (to play tennis) made out of Kevlar, for $60. Last month I bought a pair of better quality Nike’s for under $60, this is almost 27 years later. I bought a Toshiba Laptop in 2001 for about $1,500. Today I can buy a computer 30 times better for the same amount or less. There is some inflation , however the improvements in the quality of life and the quality of products we have today cannot be measured.

    Reply
    • MKE January 19, 2022, 9:38 am

      Reformed? How exactly?

      I suppose my shoes and computer are cheaper. That’s not how I measure my quality of life, though.

      Reply
  • BW January 18, 2022, 1:26 pm

    I agree with the overall tenor, but unfortunately, the textbook exposition on inflation is actually quite misleading:

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

    Too much money doesn’t create inflation, too much demand CAN. (The difference here is that if the money supply increases, but that money isn’t spent, it doesn’t generate demand). If demand in the economy gets too high, it would cause inflation, but…

    Excess demand is only one possible source of inflation.

    In general businesses will try to produce more goods to meet demand – rather than increase prices. When do businesses raise prices? most often it’s when their costs go up. So supply shocks to the most common business inputs (wages, energy, credit) are the likely culprits to produce inflation. We’ve a massive number of people quitting their jobs, increasing energy prices, and increasing shipping products. Not surprising those would lead to inflation.

    The reason this matters is because if affects how we should deal with it. If there’s too much demand, we should reduce demand, but if it’s supply side factors, we would deal with those differently (and reducing demand won’t necessarily help).

    Monopoly/non-competitive conditions can also contribute if companies can raise prices above competitive levels.

    Reply
  • MKE January 19, 2022, 9:43 am

    Car fatalities have remained relatively stable over the decades. They have been on the rise recently, especially the number of drivers killing pedestrians. Fatality rates are a better measure of automotive progress than how many seconds it takes to go from zero to sixty for a certain amount of dollars. We are measuring the wrong things with the wrong tool.
    (“Safety” measures like seatbelts, airbags, antilock brakes, self-driving, etc. have not improved anything).

    Reply
    • Mr. Money Mustache January 19, 2022, 1:00 pm

      I agree with this too – cars are improving from a user perspective, but not from a societal perspective. In fact, the nicer you make cars, the more you compound the problem that CARS WRECK EVERYTHING!

      The ideal solution is to get people more excited about *not* driving. Technical bandaids like autonomous driving will help with the fatalities eventually, but we’ll still waste a lot of pavement and have sprawled out cities unless we learn to embrace nicer city designs, walking, biking, electric scooters, etc.

      Reply
  • MKE January 19, 2022, 10:08 am

    Economics is bogus. You can apply it as convenient, and ignore it when inconvenient. Contradictions of economic theories are as easy to find as confirmations. From this article:https://aeon.co/essays/economics-is-once-again-becoming-a-worldly-science?utm_source=pocket-newtab

    The greatest indictment of the application of neoclassical price theory to smoking is the way those people with the least financial incentive to respond to the price signal appear to have responded most strongly, while those with the strongest incentive were not impelled to react. Today, in affluent neighbourhoods in Britain smoking rates are under 10 per cent, whereas in some poor ones it’s 50 per cent. If neoclassical theory were sound, those numbers would be reversed. Around the world, this trend is replicated. That’s a fundamental breach of neoclassical economic principles.

    Reply
    • Mr. Money Mustache January 19, 2022, 12:57 pm

      Right, which is why I’m such a big fan of Behavioral Economics rather than the old “everybody behaves rationally” Neoclassical ideas.

      Most humans are very irrational creatures, which means to change their behavior we need to change the culture and social norms rather than just expecting price signals to try to do it all. I’m making my own attempt at it with these blog articles, but there are many other (better) ways to create change.

      https://www.mrmoneymustache.com/2013/11/21/predictably-irrational/

      Reply
  • Mark January 19, 2022, 1:38 pm

    What about when interest rates go negative. If you look at the stock market performance from1980 to present and overlay interest rate increases by the fed during this time.

    You will see an interesting story unfolding. Every time we saw the stock market heating up and over extending itself, that is immediately followed by a large decline. And what action caused these declines? The fed raising interest rates.

    From 1957 when we left the gold standard until the early 1980s we saw inflation was on a rampage. We saw inflation nearing 20% at the end of that Era. The fed raised interest rates all the way up to 8+% which caused the first of 4 market drops over the last 40 years. After a period of decline inflation went lower, interest rates fell and the stock market started heating up again and making all time highs. Inflation started increasing again so the fed had to raise rates again.

    This time, the fed was only able to raise rates to the 5 or 6% level before the market started its big decline the dot com bubble.

    Several years later, we see the same pattern. the markets started heating up again and making new highs until it was over extended, inflation started creeping up and interest rates were at all time lows. Then the fed had to raise rates, but this time they were only able to raise interest rates to 3.5 or 4% before the financial crisis of 2008 and the market lost badly. Bear with me here.

    And finally for the most recent decline in 2018. After a period of lowering interest rates to zero, quantitative easing and pumping money into the market. The stock market thrived again reaching new highs and getting over extended. The fed started using their tools again and began raising interest rates. This time they were only able to raise interest rates to 2.25% before the market rolled over and the fed called uncle uncle, forced into lowering rates again.

    Do you see the trend? The first decline was preceded by interest rates being increased all the way to 8%. The second time they could only go as high as 5-6%. The third time only 4%. And the last time only 2.25% before the markets rolled over.

    In order to keep the markets propped up, this requires low interest rates, but when inflation heats up, the fed has to raise rates, or buy bonds, etc. I mean seriously who in their right mind would be buying bonds at these insanely low rates where a treasury might only be earning 1% while inflation is 5 or 6%. The answer is uncle sam….the only one doing it.

    What does this mean? Well it is my opinion based on this trend that the only choice will be for interest rates to go negative at some point like they have done in Switzerland. Yes, the fed has said that will not happen. But seriously, can you really believe anything these politicians and government officials say? They say something will never happen and then it does. We say thus during the pandemic.

    Considering the last major drop was preceded by interest rates only making it up to 2.25%, well, we are sitting at zero or near zero now. Very soon the fed will start trying to raise rates again and I am guessing rates won’t even get as high as 1% before we start seeing problems in the market.

    When we are this close to zero, there is nowhere to go but negative rates. That means any money you have sitting in savings will not only not earn the pathetic 0.10% interest per year we are seeing now, but instead if rates go to -1%, that means you will lose 1% per year on any money sitting in your savings account.

    People who take out new mortgages will actually be paid interest by the bank on their loans instead of vice-versa. And during those high inflationary periods from 1957 to the early 1980s a $100,000 investment would have lost 50% in value due to poor market performance and the inevitable inflationary haircuts along the way.

    I have no idea how to counter these issues, other than to say during that same time we saw commodities thriving like gold, platinum, oil, etc. People invested in those things made decent money, but I don’t know anything about that. Just sharing my thoughts about what I am seeing right now and the patterns unfolding.

    If you look at a price chart for gold during the 1950s through 1980. And compare a price chart of gold for the last 5 years or so, the charts from the 1950s right before gold started spiking in value look almost identical to what we are seeing now on gold. Again I am not invest in this stuff, just sharing my observations.

    Reply
  • Ken January 20, 2022, 8:39 am

    Great article, just what I needed after reading all the gloom and doom news about inflation. In 1982 I had a high school history teacher that planted the first seeds of what I would later know as mustachianism, I have both of you to thank for playing a part in not only my financial situation and early retirement but my general happiness as well.

    Reply
  • Chris B January 20, 2022, 10:53 am

    If we were completely rational, we would balance the downsides of inflation (menu changing costs, bond losses, etc.) with the upsides of inflation. Why aren’t mortgage-holders fist pumping? Why isn’t anyone celebrating the fact that the U.S. national debt has just dropped 7% in terms of how much work we’ll all have to do to dig ourselves out of it? Why not more excitement about how people are being pressured to reduce their unproductive savings accounts and either invest it or consume it? Bank profits stand to rise dramatically and they still have PE’s around 12.

    Reply
    • Fred January 21, 2022, 9:12 am

      When I was a teenager, one of my close friend’s fathers was the CEO of a mid-size manufacturing company. Every time we spoke about his company, macroeconomic changes, or something else, he’d say, “Let’s just say there’s a lot of opportunity” which was a sort of tongue-in-cheek way of saying “well, things are pretty challenging.” Running a manufacturing company in the US in the 90s/00s was not for the faint of heart. Through decades of leadership of that company, it continued to grow in both good times and bad because this man was able to see the opportunities that every new problem brought.

      Your comment reminded me of his perspective. Every new set of challenges brings with it a certain set of silver linings and opportunities. For me, personally, we’ll be buckling down over the next year a little more than we have in recent years, as I anticipate a correction in the markets that will provide a buying opportunity and I’d like to be able to take advantage of it.

      Reply
  • Miles January 22, 2022, 5:17 pm

    I think inflation isn’t a great measure of relative wealth for most people. Joe Schmoe’s income grows slower than inflation and the price of basic necessities is extremely volatile compared to the overall inflation rate. It just happens to be the word everyone knows about. When Joe complains about inflation, he’s really saying the prices of the cheaper meat & potatoes products, basic home and transportation maintenance costs, and some lower end luxuries like sports equipment and consumer electronics have quintupled in price but his income has decreased by 5% in the same period.

    Maybe it’s just cause I’ve been following your blog for a while but any time I see this topic any more my first reaction is that yes, inflation isn’t the real problem but that doesn’t mean that there’s no problem.

    Reply
  • Froogal Stoodent January 26, 2022, 4:05 am

    The current inflation isn’t a big concern to me, because it’s most likely temporary.

    One of the things that DOES have me a little concerned is the common assumption among economic policymakers that continued growth will make all our problems go away over time.

    Since MMM is well-read, I’m sure he’s seen the bacterial growth curve graph–or really, any graph of exponential growth in a closed system over time. The point is that eventually, the growth slows and levels off.

    But if policymakers keep assuming that continued growth will fix all of our current economic problems (ballooning national debt, poverty, joblessness, etc.), we will run out of room to grow. If we keep kicking that can down the road, we may find that one day it bounces off a wall.

    Reply
    • Mr. Money Mustache January 26, 2022, 5:31 pm

      Yes! And this will be a glorious thing to gradually move into – a sustainable economy that is not necessarily built upon growth. At least not in the traditional sense of using up more and more chunks of the Earth at an accelerating rate.

      On the other hand, the valuable parts of growth – increases in human knowledge, health, education, happiness – are not subject to these limits, so I definitely hope they continue for much longer than our traditional “big chunks of metal” growth model.

      Reply
      • Froogal Stoodent January 27, 2022, 4:43 am

        I agree – it’s good to move away from industrial growth based on digging things out of the ground. Tech – specifically software – allows for growth without using up finite resources (though the devices themselves do, of course, rely on some rare earth metals).

        My concern is that much of our fiscal policy seems to be based upon the assumption that the economy will keep growing indefinitely. Naturally, it’s a lot easier for politicians to kick problems into the future than to deal with them now! I shudder to think what will happen when economic growth slows or stops for a long period, though I’m not smart enough to grasp the full implications. I just think it won’t be pretty, at least for a lot of people.

        Either way, Mustachians are used to living well within their means and minimizing waste – so we’ll be fine either way!

        Reply
  • Vess the Best January 26, 2022, 1:33 pm

    Hey folks. I know the MMM vibe is super positive but I have a little rant.
    My salary is fixed for 8 years (and then projected to rise by the staggering amount of 300 EUR). I don’t even know when these salaries were determined in the first place, but they have likely already been eroding when I joined this institution. I’m in academia, in a field extremely inelastic even by academia standards. So ‘asking for a raise’ is not an option; ‘looking for a new job’ is not an option either, unless it means leaving academia. Which I’ve been shopping around and is not as easy as it sounds either… FML at this point.
    On the bright side (I guess??) my contract is temporary so I won’t have the chance to endure this for 8 years in the first place, but will have to find a resolution in one way or other in a couple of years.
    Is there anyone else in academia here? Do you have any advice?
    all the best,
    Ves the Best

    Reply
    • Mr. Money Mustache January 26, 2022, 5:28 pm

      Hi Vess,

      If you’re super set on academia as a soulcraft pursuit, what about thinking of something ELSE as your source of accelerated income? There are any number of fields, depending on your interests and motivation. For me, it has always been carpentry and house building, and that’s in demand everywhere. But if not, what about academic tutoring? Starting a YouTube channel or blog in your field of passion and then writing a popular book? Airbnb hosting? Real estate house hacking / rental properties?

      There is no rule that says you have to do these things – they are just ideas that can lead to more money. But sometimes, if your life is great as it is, you don’t even need more money.

      Reply
  • AnthonyC February 3, 2022, 2:23 am

    Hello MMM,

    I have been reading articles by Ray Dalio ( https://www.linkedin.com/pulse/changing-world-order-new-paradigm-ray-dalio/?published=t ) about the rise of China, internal conflicts in America, printing money, wealth gaps, inflation, low interest rates and government debt. Do you believe the America will cease to be the Existing Great Power in the next 5-10 years and if so should we be removing our money from the S&P 500 index fund and start to purchase an index fund that tracks the Shanghai Composite Index if China is going to be the New World Order?

    thank you
    Anthony

    Reply
  • Martize Smith February 11, 2022, 10:54 am

    It’s interesting how a person can have no knowledge, I’m not talking about people on here, not understand inflation yet can still win if they focus on earning more and controlling expenses sand invest. Game over and won.

    Reply
  • Ron Lehman February 13, 2022, 12:45 pm

    The reason inflation is a concern for investors is that since it hurts companies earnings and thus hurts share prices.

    Wages go up, cost of supplies go up, companies earnings are impacted and then share prices are impacted …

    It seems that those that have a real estate portfolio have a great way to protect against inflation.

    But for the S&P 500 I don’t see inflation being a good thing.

    Keeping fingers crossed that it all turns out ok :)

    Reply
    • Mr. Money Mustache February 14, 2022, 10:40 am

      …unless those companies are able to pass those costs on to their customers, which completes the cycle of everything just rising in price with a fairly neutral overall effect. Which is kind of the definition of inflation. Of course, as with every change there are always some who win and some who lose, but as long as the rate is fairly slow we do all right.

      From my understanding, the bigger issue is that higher inflation leads to higher interest rates, which means the future value of company earnings are worth less relative to the alternative of risk-free interest bearing investments. For example, as an investor, $10 per share of dividends payable to me in the year 2030 is now worth quite a bit less than that same promise made to me two years ago.

      Reply
  • Pedro February 26, 2022, 7:38 am

    Inflation as we know (artificially made by central banks) doesn’t suddenly double your salary at the same time of doubling the price of bananas. It actually has a timming and a “queue” list for it to hit. And that’s why first of all the last of that queue gets hit badly, and second it creates a distortion in the economy, when the prices don’t reflex the reality because they have an artificial distortion it drives the money flow to different ways it would naturally go.

    Plus, the sentence “inflation makes folks spend more and boost the economy” is a very well known fallacy that I recomend you to research.

    Economics In One Lesson, by Henry Hazlitt, a very easy to read book I recommend to anyone who wants to understand this matter.

    Reply
  • Robert March 14, 2022, 11:00 pm

    Hi!

    Soo, for the borrowers is a good deal inflation. Me and my family was looking for a house pre-covid and has still not bought one.

    What’s your advice on the topic? Should we just buy because “the prices will only go up”? Demand will always beat supply.

    What will have too happen for the prices to decrease? Does not seem like a likely thing to happen.

    Some argue that increase of the bond won’t happen because the inflation is driven by energy prices.

    Any thoughts?

    Thank you in advance!

    Reply
  • Dan March 29, 2022, 9:30 am

    Mr. mm,
    Long time reader, I was here before FIRE was even labelled as such, taken a few year hiatus but checking back in!

    Well on my way to FI in large part to your early articles and JLF thoughts, so thank you!

    Couple questions;

    Do you think expansion of the money supply is a big contributor to wealth inequality?

    Have we got growing economies (GDP) over time because of the massive amount of money pumped in to the system in the form of debt?

    I find it interesting as people pursuing fire we are eliminating our personal debts, consuming less and living value-centric lifestyles which could be seen as deflationary in nature. Because we do this we have more free time to pursue passions, self actualize and help others. Fire individuals live a life of abundance in many ways (time, financial, connections), could a deflationary currency usher in something like this at large scale? Should we consider the downsides to expansion in the monetary supply?

    Although not perfect Bitcoin may have something to offer in this area.
    The price of tomorrow is a good book on these topics written by Jeff Booth.

    Thanks.

    Reply
  • Passive Canuck March 30, 2022, 11:03 pm

    What you’re describing is basically identical to what the situation is here in Canada, just north of the border. Inflation isn’t really a big worry for investors like myself who have a large chunk of total holdings in strong blue chips, especially ones that pay dividends.

    Actually I was having a debate recently with a family member who has cash just sitting and trying to explain what inflation was doing to his non-invested cash. He didn’t grasp it, but it might be just Italian stubbornness showing.

    Anyways, great read MMM!

    Reply
  • Nate Merrill April 20, 2022, 9:24 am

    Fortunately, we have been insulated from the effects of inflation as a family. We purchase beef from a farmer and stock our freezer, we grow quite a bit of food, and anything that has spiked significantly we have shifted our consumption from (eggs and chicken have gone through the roof with the avian flu). I was able to purchase a bunch of lumber at a comparative discount at the end of last summer when it dipped and was able to store that for some projects this spring\summer. I am sure I will be really exposed to inflated prices this fall when we buy beef again.

    Reply
  • jdc732 May 31, 2022, 6:29 pm

    I didn’t know Triple M was such an advocate of MMT. This is strange since Mustashianism holds up frugality as one of its primary virtues. Yet, Keynesian economics, and its most recent iteration (MMT), promote spending in excess (extreme, at times) of government revenue. Contradictory?

    Perhaps we (prudent savers and investors that read MMM) aren’t feeling the painful effects of deficit spending and its resultant inflation the way other countries (Venezuela comes to mind) have but, does that make it ok? Just because China is the biggest nation state polluter by far, doesn’t give the US carte blanche to continue on our environmentally unfriendly trajectory.

    And let’s not forget the original reason for govt overspending and its inflationary result; the financing of various wars/”crises”. This has continued to this very day (the disastrous, illegitimate, and costly war in Iraq comes to mind) and enables terrible conduct on the part of our politicians without accountability (how has GW Bush paid for enriching the military industrial complex?).

    Finally, government overspending incentivizes low time preference amongst its citizens, making people less likely to save because their money is losing value day in, day out. This, in turn, has the effect of forcing citizens (if they have excess resources) into investments that involve risk, like stocks or crypto, that can, and often do, lose value. Citizens, then, are much more exposed to the ill effects that boom and bust business cycles (created by inflation) engender.

    Reply
  • dat nguyen June 22, 2022, 5:42 am

    yeah, it may be true in the US, or other capitalist countries.
    I live in Viet Nam, and here is the Index https://vn.investing.com/indices/vn
    15 years WITHOUT GROWTH (not even counting inflation)
    At the time I write this comment, the gas price of Vietnam is HIGHER than that of the US while GDP per capita is 20 TIMES LOWER.
    I’ve been reading your blog for about 2 years and still feel stuck when applying what I’ve learned into the economy of Vietnam
    Any advice for me please

    Reply
  • Johnny Money August 15, 2022, 5:45 am

    I too I bought my first Windows PC (a 486 DX2-50) w 8 Mb ram in 1993 at the staggering cost of $2600. The upgrade to 16 Mb was 550$. Micron was subsequently busted for price manipulation. Today, its possible to buy 16 GIGABYTES DDR5 4800 for 86$ Thats 34$/Mb in ’93, and .01 cent per megabyte in ’22.

    I definitely agree that the fed chooses a setting for the gas pedal of the economy, and lately with the extraordinary tool of Quantitative Easing, including 2/3 bonds and 1/3 real estate roughly, a buying program to provide liquidity in markets and prevent “wild” behavior. Now that’s over, so the reverse is happening. In my market, I believe there’s a substantial “distressed” supply that has been held back and is being fed in as they are able(HUD Homes) as well as the fed level “unwinding” of their QE positions. 60 Billion a month treasuries, 35 Billion a month on MBS ( Mortgage Backed Securities. https://www.barrons.com/articles/fed-balance-sheet-quantitative-tightening-2022-51659731026 I expect significant side effects/hangover.

    Given the significant damage we are doing to the planet, I suggest we set the economy at a lower setting.

    Reply

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