Inflation, And Other Equally-Sexy Subjects

Yesterday, I happened to get into a rather in-depth conversation with one of my favourite co-workers on the topic of inflation. I don't think either of us originally intended to dwell on it anywhere nearly as long as we did, and yet, for whatever reason, there we dwelled.

The bone of contention between us was an assertion he'd come across recently that stated that the true rate of inflation, at least in the U.S., is more like 10 - 12% rather than the 2 - 4% that's regularly published (and used for indexing things like government-run financial programs). I love a conspiracy theory as much as the next geek, but this one just didn't jibe with my own experience of spending money. He quoted some examples of where the calculation of the inflation rate is clearly 'rigged', like when those doing the number crunching for the cost of a PC consider its processing power compared to earlier versions (and thus say the actual 'cost' is going down even if prices go up). But even that sort of thing didn't touch my bottom line in this debate, which is that I don't think real inflation is anywhere near double digits.

For example, a 12% inflation rate, if it continued for several years, would mean that the cost of items would, on average, double every 6 years. (I use the "Rule of 72" for things like that, which states that you can determine approximately how quickly a compounded rate will double by simply dividing 72 by that rate.. so 10% doubles in about 7 years, 6% doubles in about 12 years, and so on.) Using that fact, I tried to think of anything that I buy that's doubled in price since 2001. The only one I could come close on was natural gas, which I'm not sure about but at least could've done so. Comics certainly haven't. Bread or milk? Not anywhere near double. I spend $10 - $15 dollars on a sit-down lunch meal most days, but I don't remember being able to get that same sort of treat for $5 - $7 just 6 years ago. I mentioned this during our conversation but my companion remained unconvinced.

After we talked, I thought about it in a different way. Ever since I left the bank (and my endless supply of service charge-less accounts there) at the end of 2000, Vicki and I have used a spreadsheet to balance our various 'buckets' of money: Vacation, Bills, Spending, Charity, Car Replacement, Medical, etc, (where we'd previously had an actual account for each). Because of that, it's easy for me to see that we've increased our Bills allocation, for example, from $850/month (in 2001) to $1240/month (currently). Over that period, nothing about our lifestyle has gone down (we've never cut anything out), and we've actually upgraded in some areas (we now have a PVR box, so cable's more expensive; we have more electronic gadgets that chew up electricity and occasionally need replacing, both of which can impact the Bills total). So that's a less-than-50% increase along with a higher standard of living, meaning it'd probably be more like a 30 - 40% increase if we'd kept the playing field level. Which is fairly consistent with a 4% average inflation rate, I think.

But what do others think? Is inflation really higher than it's advertised as being? Are your 2 - 5% raises each year keeping pace, or causing you to fall behind? Or is it all irrelevant because no matter how much money you make, you'll always find a way to spend 110% of it?