What The Last 20 Years Of Inflation Teaches Us About Building Wealth

What The Last 20 Years Of Inflation Teaches Us About Building Wealth

If you want to build great wealth, you must invest in risk assets over the long term. If you hold most of your net worth in cash, your purchasing power will fall behind due to inflation.

Today, $3 million is the new $1 million when people talk about what it’s like to achieve real millionaire status. Heck, some people might double that figure to $6 million if there is a two-parent household.

I remember filling up my Toyota Corolla beater for 95 cents a gallon back in 1995. Today, I sometimes have to pay over $4 a gallon. So many things have gotten so much more expensive over the past couple of decades. Inflation really is a nasty bugger if you’re on the wrong side of it.

Let’s drill down and see how the prices of select consumer goods and services have changed since January 1998.


The Inflation Of Select US Consumer Goods and Services

Below is by far my favorite inflation chart by Carpe Diem. All of the data comes from the Bureau of Labor Statistics. Based on select US consumer goods, services, and wages, overall inflation rose by 57.6% from January 1998 to June 2019. This is an annual compound inflation rate of 2.3%.

Last 20 years of inflation

From this inflation chart, we can learn the following:

1) Letting yourself go is costly. While Medical Care services have grown 2.2X faster than overall inflation, the cost of Hospital services has grown 4X faster than overall inflation since 1998. As a result, it is imperative that we all stay as fit as possible.

If you are on the path to financial independence or have achieved financial independence, it makes zero sense to be out of shape. Once you’ve won the lottery, your goal should be to live for as long as possible.

Even if you have to pay more to subsidize the less healthy, it’s worth staying in shape and eating better to try and reduce your chances of heart disease (~23% of all deaths), cancer (~21% of all deaths), chronic lower respiratory disease (~6% of all deaths), strokes and cerebrovascular disease (~5% of all deaths), and more.

Once you lose your health, no amount of wealth matters. Let’s all cut down on sugar, exercise at least 3X a week, and work on our mental health.

2) College is a racket. The primary cost to run a college is personnel costs. So how is it that college tuition, fees, and textbooks have risen 3X faster than the rate of inflation since 1998 and hourly wage growth has only grown by 35% more than overall inflation?

The answer is colleges take advantage of parents’ hearts and charge excessive amounts for a depreciating product. Colleges know that parents want the best for their child, even if they can’t afford the cost. As a result, despite massive endowments, colleges purposefully jack up tuition and fees out of greed.

You should be mad that college textbooks have grown so expensive despite the huge growth of digital books. Colleges price their product as if they were oligopolies and don’t even promise their graduates jobs.

I’m hopeful that more students and parents will wise up to the fact that colleges have been taking unfair advantage of the American public for way too long.

If you have to pay rack rate for college, do not go! Starting your work career with massive debt is a big mistake.

3) Younger Americans are doing better than they think. Despite constant reports saying that real wages haven’t kept up with inflation, Average Hourly Wages according to the BLS has grown faster than overall inflation by about 50% since 1998.

It’s only after you have kids and want to send them to college do you start feeling poorer. For most Americans, the burden of health care costs doesn’t hit until the last third of our lives. Therefore, younger Americans with no kids should be feeling pretty good about life.

Although, if we look at the Real Median Household Income according to the U.S. Census Bureau, the median household income of roughly $62,000 is only 6% higher than the median household income of $58,612 in 1998. At least we’re now at a record high.

Real Median Household Income In The US

If you want to achieve financial independence sooner, one obvious solution is to not have kids and never get sick.

4) Owning your primary residence is a wise move. Housing inflation has slightly outperformed overall inflation since 1998. As an average homeowner, not only do you benefit from your home’s value inflating at ~2.4% a year on average, you also get the benefit of fixing your mortgage rate and paying it back with inflating dollars. This is a triple win!

Contrast the homeowner’s situation with the renter’s situation who now has to pay 60% higher rent today than in 1998 while having no equity after all these years. Renting for the long-term is like shorting the S&P 500 for the long-term. It is likely going to be a losing proposition.

Obviously, don’t churn your property or buy more property than you can comfortably afford. The return on rent is always -100%. At least with long-term property ownership, there is a chance to make money.

Once you pay off your house, it makes it much easier to live on a near-poverty income in retirement if necessary.

5) Take advantage of cheap electronics to create, not just consume. I’m not sure whether we truly appreciate how incredible it is to have powerful laptops and mobile phones. Back in the 1990s, it cost a fortune to own a 286 computer. There was no internet at our fingertips to do any research or make any money online.

Today, thanks to cheap electronics, the internet, and video conferencing, you no longer have to go into an office, work a traditional job, feel as bad leaving loved ones for a prolonged period of time, or pay to learn anything.

Instead of manually tracking my net worth with a pen and paper or Excel spreadsheet, I do so for free with a financial app on my phone. Instead of typing out a blog post, I can voice dictate the entire post on my phone on the beach. Back in 2009, it cost me about $1,000 to set up my website. Today, you can set up your own website in under an hour for under $50.

Don’t feel guilty buying a $1,000 mobile phone or a $1,800 laptop. Electronics are truly the best value out of all consumer goods today. They are even better if you use your electronics to create instead of only to consume. Use technology to create more freedom.

To Beat Inflation, Don’t Stop Investing

What The Last 20 Years Of Inflation Teaches Us About Building Wealth

Your goal should be to own as many inflating assets as possible, especially if you plan to raise children and get out of shape. My favorite inflating asset over the past 16 years has been San Francisco and Honolulu real estate, followed by the S&P 500.

For the next 20 years, I’m betting on heartland real estate to handily beat overall inflation every year. I suspect the S&P 500 will beat inflation as well given the dividend yield alone is already about 2%. Overall, over the long run, I don’t think surpassing a 2.3% average inflation rate a year will be very difficult.

The difficult thing will be to have the discipline to not only save aggressively but to also consistently invest your savings in a risk-appropriate way.

There will undoubtedly be times when we not only don’t beat annual inflation but also lose on some of our investments big time. However, if we can consistently invest during difficult times, I’m confident most of us will turn out fine.

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