Inflation is not constant... not exactly breaking news, I know.
However, if I am trying to project future inflation so I can decide if my retirement funds are growing quickly enough, its handy to know what historical inflation has been.
In a previous post (https://seekingalpha.com/instablog/134376-kiisu-buraun/852671-would-a-dogs-of-the-dow-retirement-portfolio-survived-the-last-12-years) I looked at historical inflation through the eyes of a new retiree in the year 2000. In the post, I looked back 10, 20, 30, 40 and 50 years to get an estimated inflation rate and used that rate to increase withdrawals from a retirement portfolio.
However, it is now mid 2012, not 2000 and I thought it might be interesting to see what has happend to our money.
InflationData (http://inflationdata.com/Inflation/Inflation_Calculators/Cumulative_Inflation_Calculator.aspx) provided the cumulative inflation data, and Investopedia (www.investopedia.com/calculator/CAGR.aspx) provided the CAGR calculator.
CAIR (Compound Annual Inflation Rate) is merely CAGR applied to inflation.
Examples help me understand. And I find the following examples enlightening:
For every $100 of buying power I had at the end of:
- 2008, I would now need $107.35.
- 2001, I would now need $127.71.
- 1961, I would now need $752.24.
- 1914, I would now need $2,234.38.
Thus, if we ignore taxes and my retirement projections are "golden" with a 3% inflation rate and future inflation mimics the recent sub 3% rate, all is well.
However, if in the future the CAIR creeps up and I don't adjust my projections accordingly, I can easily deceive myself with a rosy projection that does not meet reality.
And that could be "interesting."