Why does inflation seem so bad?

By Craig Verdi CFP®

Inflation seems bad because we really are paying higher prices and in some cases much higher prices on goods and services. Healthcare is the glaring exception when it comes to inflation. It is much higher and probably will continue as we get older. But with the old health care from 50 or 100 years ago you may not have had to worry as much about getting older.

However, inflation may have more to do with perceptions and our thinking process than it does with rising prices. As I read comments about the market I continually hear that “anyone who has bought groceries knows that the government is underestimating inflation.” I shop for groceries. They seem cheap. The gallon of milk is still around $2 and my Kroger Raisin bran is still $2. Bread is $2. Chicken is $1.79 lb. Pork is cheap. Eggs are cheap. Beef is too popular and IS expensive. Household items like soap and cleaners, tissue and over the counter drugs are cheaper now than 10 years ago.

About 10 years ago I was at Hillcrest Country club and looking at the prime rib on the menu. It was $19.99. I asked the waiter why it was so reasonable. He said because the board members think it should be $12.99 because that’s what they paid all over town, but that was 20 years ago. Remember the concept of mental anchoring with your portfolio? Anchoring focuses you on “the highest amount it ever was.” Inflation anchoring focuses on the “lowest price we remember” in the past. This creates the feeling that you are worse off than if you looked at long term averages.

Speaking of Country clubs, they are about 30% less to join and belong to than they were 20 years ago. Green fees have stayed low. The website GolfNow.com is killing the profit margins for golf courses and giving us much cheaper golf.

Anchoring focuses you on “the highest amount it ever was.” Inflation anchoring focuses on the “lowest price we remember” in the past.

At 3.5% annual inflation your money loses half its value in about 20 years. And a given product could be expected to double in price in 20 years.

Just about everything we buy is cheaper than inflation has been. Many things are way cheaper. That 4x HD TV you dreamed of at Costco was about $6,000 last year and this year it’s $1800. You can buy a very good camera for $400 dollars and never buy or develop film. Airline fares are dirt cheap. I flew to Phoenix three or 4 times a year from Spokane in the 70’s. Round trip was always the same (best fare) was $160-$206. I still fly there a lot and the fare on sale is $288.00 currently on Southwest. Normal is about $380. So airline tickets have not even doubled in that 35 plus period. We just don’t get food or leg room.

I had lunch with an orthodontist the other day. He said that the cost of braces has long been compared to the cost of a Volkswagen beetle. In 1970 the cost of the VW and the braces were the same, about $6000. Today the car costs $22,000 and the braces are $5,000. There is a steady decline in prices in many things we don’t think about. Electronics is the big one. My first color TV I bought in 1976 was $279.00. It was a 17 inch RCA with no remote and horrible picture. You can get a brand new 32 inch TV for that much right now with HD.

Other stuff we don’t pay as much for:

  • Long Distance calls
  • Auto maintenance
  • Tires- I haven’t had to change a tire in 25 years. I used to do it about yearly
  • Appliances
  • Furniture
  • Tools
  • I have a box fan in my bedroom. The same one we have bought for decades. They were $30 twenty years ago. Now they are 19.99 and quiet and use less power.
  • Natural Gas is dirt cheap
  • We don’t have to pay for information like we did. Most of it is free.
  • Antiques are worth less than they were 20 years ago. Why? EBay.
  • Mutual fund management fees – When I started in the business funds charged about 1.5%-2% for running the fund now they’re around 1%.
  • Processing payroll is cheaper than it was in the 70’s.
  • Outdoor equipment. I can buy a $30.00 fishing rod that is 10 times better than a $30 rod 50 years ago. Golf clubs are at least 10 times better (I think) and you can get a cheap set for $150.00 that may not be great, but they are way ahead of anything Sam Snead ever hit.
  • Toys
  • Clothes