Monday, July 18, 2011
Hello, Monday. Hello, office. There may be somewhere else you’d rather be right about now than sitting at your computer reading this blog (no offense taken). Maybe it is on whatever planet Jimmy Buffet is actually on (drinking margaritas), or just at the pool (doesn’t have to be a fancy pool, just one with a view of the Caribbean ocean and a swim-up bar) drinking margaritas. Maybe it’s traveling around the world (hello, Italian villa) or even simpler than that, you wish you were at the movies checking out the new Harry Potter film (the last one!).
What if we just quit our jobs, and had the freedom to do whatever we pleased whenever we pleased. This sounds like a reasonable goal in life. What would we need to have to be able to achieve this? Obviously, money. How much? Depends on how you would want to celebrate this newfound freedom. Not only would we need to consider how much the stuff we want costs now, but we would also need to plan for what the same stuff will cost over time (we don’t ever want to give up this freedom, do we?). As prices for stuff go up, our saved money is essentially worth less. As we spend to celebrate freedom, and as the value of our funds decreases over time, we certainly need to take this into account. What we don’t want is to wake up one day and realize we have to go back to work. Goodbye, Margaritaville.
Price increases (“inflation”) are not to be swept under the rug or dreamt away. Data released Friday shows inflation for the stuff we buy every day is back to 2009 levels (after being quite low in 2010). There are several measures of inflation we should stay aware of in our financial planning. The most immediately relevant measure, the consumer price index (CPI) registers price changes on the stuff we buy (consumer goods). In June prices (“core CPI” excluding food and energy) went up by 0.3% over May, and by 1.6% percent over last year. The Government likes inflation in the 2% range, so an annual rate of 1.6% is good. But this annual rate has been slowly creeping up since March, and likely we will need to adjust our freedom spending to account for annual consumer inflation in the 2-3% range.
Another measure of inflation relates to the prices the companies who produce the stuff we buy pay to make the stuff. This measure can be seen as a foreshadowing of prices consumers will face in the coming months – if producers are paying more to make the goods we buy, very likely those price increases will be passed along to us. Data released Thursday shows the prices producers pay (“Producer Price Index excluding food and energy” or “Core PPI”) have been increasing by an average 0.3% each month this year. At this rate producers will have prices go up by over 3% in 2011.
The reality of inflation means we would need more money over time just to maintain our current level of spending, let alone additional freedom spending. A regular stream of income to replenish our deteriorating freedom funds without having to do any work be very helpful. Sure no problem, see you in Margaritaville.
(Bureau of Labor Statistics)