Why inflation hurts more than it did 30years ago

[daisylu]

finance.yahoo.com/news/Why-inflation-hurts-more-than-apf-916813098.html?x=0

Agree or disagree? I was alive, but too young to understand.

[Small Biz Owner]

The median U.S. inflation-adjusted household income -- wages and investment income -- fell to $49,777 in 2009, the most recent year for which figures are available, the Census Bureau says. That was 0.7 percent less than in 2008.

Incomes probably dipped last year to $49,650, estimates Lynn Reaser, chief economist at Point Loma Nazarene University in San Diego and a board member of the National Association for Business Economics. That would mark a 0.3 percent drop from 2009. And incomes are likely to fall again this year -- to $49,300, she says.

From the link to the article.

That says it all. Incomes are still dropping.

[Savoir Faire-Demogague in NJ]

The problem is the typical middle class lifestyle is what the upper income class lifestyle was 30 to 40 years ago.
If the population was actually living a little below their means, inflationary pressures would not be causing problems.

Anyone living below their means is getting along just fine.

ETA: I forgot to point out the intrusion of govts in this equation, particularly state and local govts, who are raising levies, property taxes, fees, charges and are writing more summons/tickets than ever before.

[april47]

I don't know. 30 years I was raising young kids. Somehow I didn't feel deprived if I couldn't afford the latest gadget, eat breakfast at Starbucks, or have a master suite with a gigantic bath. I didn't know that I should expect instant commmunication with the latest phone and internet. I wrote letters. I didn't know that I should expect to see more than 8 channels on the TV. I had a nice little closet that held all my clothes and formica countertops that served their purpose. The microwave was a luxury used for heating up left-overs not cooking from scratch. It seems like today, the more you have the more it hurts when you have to cut back. We could all cut back today and still be blessed.

[resolution]

I think it hurts even if you aren't living an extravagant lifestyle or above your means. With income flat and expenses rising that means less money available to save or invest for those households that don't spend everything they earn. The low cd rates really hurt retired people that were responsible and saved during their working years. People that could have lived off interest in previous years may need to dip into thier principle if they are only getting .44%.

[Savoir Faire-Demogague in NJ]

That really isn't a problem though is it? I guess in some senses it would be better to all be on the brink of starvation, because then when the hard times come we won't as much of an adjustment.

Up until roughly the 1980s, the typical middle class home was 1200 square feet. Today it is more than double that size. The profileration of high end technical gadgets, big/flat screen tv's, manucured landscaping, intricately decorated homes, two late model cars, is fairly typical today.
Middle class families spending right up to their means(income) is the problem.

[Savoir Faire-Demogague in NJ]

I agree. We do live below our means, but still all the taxes and fees are sinking us. What to do?

Taxes and fees are govt levies... I've always posted that the biggest problems middle class consumers face have been created by the govt.

[bean29]

I was questioning this yesterday. How many of us that post here are really feeling the cost of living increase? It seems as though most of the people that post here are bragging that they get raises and are doing well.

I haven't done our taxes yet, and DH is self employed, but my general sense is we did better last year and are ahead of inflation.

It is taxes that are killing us - mostly property taxes. But we also pay hefty sales, fed and state income taxes and those sneaky user fees. They take them off the tax role and make them a fee, now they are no longer a tax deduction so the increase in costs is doubly hard to swallow.

I do sew, am actually pretty good - but I don't bother to do anything but alterations or repairs becasue it costs much more to construct a garment from scratch than to purchase it at the store ready made. I don't grow too much of anything but tomatos and flowers - gardening is not one of my skills.

My family did live a different lifestyle in the 70's and 80's but we always went on a family vacation, had nice clothing and ate out (for Pizza) pretty much once a week. Mom worked part time. Parents had two cars. We don't live all that much better than our parents did - we have two cars, but also two full time careers.

[Politically_Incorrect12]

Mar 18, 2011 8:55:58 GMT -5 resolution said:

I think it hurts even if you aren't living an extravagant lifestyle or above your means. With income flat and expenses rising that means less money available to save or invest for those households that don't spend everything they earn. The low cd rates really hurt retired people that were responsible and saved during their working years. People that could have lived off interest in previous years may need to dip into thier principle if they are only getting .44%.

While in the long run, cutting back on savings may hurt, it is probably easier to save a little less right now than trying to cut back on other things if you are living on the bare minimum already.

[Savoir Faire-Demogague in NJ]

I was questioning this yesterday. How many of us that post here are really feeling the cost of living increase? It seems as though most of the people that post here are bragging that they get raises and are doing well.
Two years ago, my firm gave out no raises, thus 0%.
Last year we got 1.75% across the board
This year I received a 3.2% increase.


It is taxes that are killing us - mostly property taxes. But we also pay hefty sales, fed and state income taxes and those sneaky user fees. They take them off the tax role and make them a fee, now they are no longer a tax deduction so the increase in costs is doubly hard to swallow.
While the baffons in both Houses of Congress lambast various business sectors, the dirty little secret out there is that excessive and unjustified tax, fee, levy, etc., increases and new tax grabs are much more draconian. This is what is sinking the middle class.


My family did live a different lifestyle in the 70's and 80's but we always went on a family vacation, had nice clothing and ate out (for Pizza) pretty much once a week. Mom worked part time. Parents had two cars. We don't live all that much better than our parents did - we have two cars, but also two full time careers.

I am mid 50s and had started and raise my family in the late 70s/80s. The ex and I always had used/pre-owned vehicles and kept them for a long time. When we ate out it was the local family style restaurant or the Newport Creamery...we also did pizza. My three punkins wore many hand-me-downs we received from her sister, whose kids were just a few years older than ours.

[Savoir Faire-Demogague in NJ]

I'd like to point out that most of the sectors that are experiencing price escalation, such as food is primarily caused by the federal reserve's devaluing the US dollar.

I just read an article this morning on the way in to the office that notes 15% of our food supply is imported. 60% of produce is imported and 80% of the seafood is also imported. This article was discussing some food safety legislation working its way through Congress.

[phil5185]

We do live below our means, but still all the taxes and fees are sinking us. What to do?

I see the opposite, I was in a much higher federal tax bracket pre-reagan than I am now, almost double.

The 10% CDs were nice, but unfortunately the 14% hyperinflation offset it.

A winning combo was to have a big mortgage - ie, owe 90% on a house. House values rose quickly with inflation so in 5 to 8 years you had >50% equity. And employers did a good job of compensating for the 14% inflation, they had COL adjustments, industry re-balance raises, sometimes 3 times a year. It wasn't a Union thing, it was the free market - if you didn't give raises your work force went across town and worked for your competitor.

[Savoir Faire-Demogague in NJ]

Phil,
Not sure if you read that correctly. The poster is talking about taxes and other govt fees, that are in place today; not the climate in the 80s.
Though everything you note is pretty much accurate.

[Politically_Incorrect12]

Mar 18, 2011 9:48:46 GMT -5 phil5185 said:

We do live below our means, but still all the taxes and fees are sinking us. What to do?

I see the opposite, I was in a much higher federal tax bracket pre-reagan than I am now, almost double.

The 10% CDs were nice, but unfortunately the 14% hyperinflation offset it.

A winning combo was to have a big mortgage - ie, owe 90% on a house. House values rose quickly with inflation so in 5 to 8 years you had >50% equity. And employers did a good job of compensating for the 14% inflation, they had COL adjustments, industry re-balance raises, sometimes 3 times a year. It wasn't a Union thing, it was the free market - if you didn't give raises your work force went across town and worked for your competitor.

So it sounds like salaries kept pace with inflation during that time frame.

[Tiny]

I am mid 50s and had started and raise my family in the late 70s/80s. The ex and I always had used/pre-owned vehicles and kept them for a long time. When we ate out it was the local family style restaurant or the Newport Creamery...we also did pizza. My three punkins wore many hand-me-downs we received from her sister, whose kids were just a few years older than ours.

But, doing those kinds of cost saving things in 2011 means you are poor and barely getting by. OK, I'm playing Devil's Advocate (sorta).

I'd agree that inflation will hurt the people least prepared (the paycheck to paycheck living people, the cronically out of work people, anyone who needs government assistance - the elderly, the mentally ill, the disabled, children with the misfortune to have loser parents...) But then again these people are the ones who always get hit the hardest.

[Savoir Faire-Demogague in NJ]

So it sounds like salaries kept pace with inflation during that time frame.

In today's economic climate, salaries are not keeping pace wtih govt taxation, fee and levy inflation. In the early part of the 2000s, govt social spending, which is 2/3's of the budget was growing at 7 to 9% per year.

[Gardening Grandma]

In the 80's I was a single parent raising two teenagers. I lived in a 2 br condo, had one car, one TV. At that time, I had a union job and the union negotiated a cola (one of the best things they ever did).

My mortgage was 11%, my savings accounts got about 6%. The cost of everything I needed (food, gas, public transportation) seemed to go up faster than my raises did.

The insidious part was that it was inflation that pushed me into higher and higher tax brackets. The tax rates weren't indexed to inflation. And there were far more tax brackets then than now.

In 1984, I earned $37,800. The marginal tax bracket was 42% (head of household). Over $34,100 and under $44,700, the tax rate was 42% of everything over $34,100 (and under $44,700)... Compared to now. These days we pay 25% (between $69K - $139,350) (married filing jointly)

I'm not sure that I agree with the premise that inflation hurts more now than then. It's different, for sure. But the elderly then were in a very, very bad spot; much worse than now (imo).

[❤ mollymouser ❤]

30 years ago, I was a 16-year-old living with my parents in a 2556 sq. ft house. I drove a Ford Mustang. I didn't have a job and wasn't earning an income (but my father did ... he was in the car business.) I also didn't have any debt. Today, I'm a 46-year-old living with my husband in a 2602 sq. ft house. I drive a Ford Mustang. I don't have a job and I'm not earning an income (but my husband is.... he's in the military.) I still don't have any debt.

My wonderful DH (along with the rest of the military) got a 1.4% increase in his base pay for 2011. But our state income taxes went up, our state sales tax went up, our state gasoline taxes went up, our state vehicle license fee went up, our municipal water prices went up, our municipal sewer prices went up, our municipal garbage prices went up, our electricity and gasoline prices went up, and our insurance premiums went up for a number of policies (including flood insurance, homeowner's insurance, umbrella insurance, and our home warranty.) I'm pretty sure cable went up, too. And I know grocery prices have gone up.

[Angel!]

Mar 18, 2011 7:35:30 GMT -5 Lady Gaga Gaga Snerd said:

The problem with our lifestyles today is that we are all much more dependent on others for our lifestyle. We have city water/sewer, trash removal, power and on and on. We cannot easliy convert to just 'living off the land'. You cannot decide to go out and hunt to survive and on and on. People will be forced to live in poverty because you will not be legally allowed to help yourself.

This wasn't really different 30 years ago was it? People weren't living off the land back then either. Most people still needed city water, power, etc.

If anything, I would think most people have much more flexibility in their budgets today (if they were willing to make some cuts). 30 years ago people didn't the expensive cell phone plans, satellite TV, internet access. I don't believe eating out or fast food was as prevalent. If you were willing to make a few sacrifices, then almost anyone could cut their budget down.

[cronewitch]

Seemed worse to me then, house prices were going up like crazy and interest rates. Pay raises were once a year so lagged when prices went up. I wanted a house but they were going up fast so you had to buy or not be able to later. A house that would have been 35K a couple of years before was 85K. We got a VA loan for 14.5% interest that took more than my paycheck. He drove a full sized pickup and gas prices were over a dollar a gallon so he wanted to trade it in but I told him it wasn't a good idea.

Inflation always hurts most to those who can't raise income like fixed income pensions or fixed interest CDs or contract payments. Investing in bonds for safety means as interest rates go up your bonds are worth less. Someone holding a bond paying 3% then getting 10% inflation is losing value since if they had to sell it would compete with 10% bonds assuming they paid the same as inflation.

Inflation is my friend now, my mortgage doesn't go up so my cost of living doesn't go up as much as a renter and I don't have to buy a new house or other major thing like cars. I haven't had a raise in 2.5 years but inflation is making my investments worth more. I own MCD stock and the dollar menu is now the special value menu or some such name so we can charge 1.29 for a 1 item, share price will go up. Dividends have gone from 45cent to 50 to 61 a quarter now in the last few years.

To beat inflation lock down your cost of living not your income.

[straydog]

I think that it is a combination of, ethanol subsidies (higher food costs), the middle east exploding (uncertainty=higher costs at the pump) and the fact that we traded our industrial base for a service sector base with the NAFTA treaty.

[comom1]

I guess I don't think it hurts worse today. Interest rates are so low compared to 1981. Inflation isn't running in double digits. In 1983 I got a 2% raise, but inflation was 4 to 5 times that.

Gas prices aren't high. I paid 1.32/gallon back in the mid 80s. I was driving a 75 Impala that got, at best, 10 mpg. It cost me between 25 and 30 dollars to fill the tank and it didn't last a week. I was making about 6.50/hr at the time. I had to work at least half a day just to put gas in the car. Even though DH and I owned a duplex and only made about 23k/year between us, we still owed some federal and state income taxes. Today, a couple in a similar, inflation adjusted situation would most likely owe nothing in taxes. There were no 401k or IRAs to shelter your income from taxes. There was no child care credit. There was no education credit. All health insurance had a deductible and you paid 20% of everything. Physicals, mammograms, immunizations and well child checkups weren't covered at all. Insurance was only for illness.

Personally, I'll take the way things are today. My taxes are low, especially compared to back then, my insurance has a copay rather than me having to pay 20% of everything, our annual physicals are covered at 100%. Heck, that alone is worth at least a four to five hundred dollars, maybe more.

I don't ever want to have to face 18% interest rates for a mortgage again. If inflation were anywhere near what it was in the early 80s, we'd never be seeing 4.5-5% mortgage rates. Gas, if adjusted for inflation, would be closer to five bucks a gallon. Every Tom, Dick and Harry can afford to fly if they want to go somewhere. That wasn't the case back then. People actually believe they NEED more than one bathroom in a house. They also believe that kids are owed their own bedrooms. As long as that mentality exists, I don't want to hear any whining about inflation.

[formerexpat]

From the link to the article.

That says it all. Incomes are still dropping.

I don't think our view can be short term.

With higher unemployment and people taking whatever they can get, I suspect it will have an effect on ST median wages. I'm guessing the same thing happened in the early 80's when unemployment was extremely high. Let's see what happens in the next several years.

For the two year period inflation has been essentially flat, so I'm not surprised that SS hasn't increased for 2 straight years. But that will be a continuing trend [low SS increases] due to our underfunding of the program and aggressive promises to the boomers.

If someone is trying to tell me that a 15% 6 month CD, >12% inflation and an 18% 30 year mortgage with 15% unemployment is better than a 2% 6 month CD, <3% inflation and a 5% 30 year mortgage with 15% total unemployment, I'm going to have to disagree. [/size]