Inflation Keeps Marching On and On

Lately when I exclaimed over the price of celery – $2.89 for four stalks for goodness sakes – my husband “reminded” me that it’s not 1989 anymore. 

Do you remember 1989?  That was the year the Loonie replaced the $1 bill, the Canadian-American Free Trade Agreement came into effect, the Calgary Flames won their only Stanley Cup, beating the Montreal Canadiens 4 games to 2, and Brian Mulroney was Prime Minister.

Toronto was having a housing bubble with the average home price reaching $273,698 – a 30-year high.  Today you’d be looking at an average of almost $850,000.

Why am I focusing on the year 1989?  It was thirty years ago and since the rule of thumb is to plan for a thirty-year retirement it will illustrate the steady march of inflation.

Related:  Determining a Safe Withdrawal Rate in Retirement

In your retirement planning, if you determined you need to withdraw $50,000 from your investments this year and increase it each year by an inflation amount of 2%, in thirty years your withdrawal would have increased to $90,568.  Yikes! That’s almost double.  No wonder people stress out about how much they need saved.

How is inflation calculated?

The prices of goods and services are constantly changing. For most products, the change is slow and not too noticeable on a day-to-day basis, but it makes a big difference over time.

The most common tool for measuring inflation is with the Consumer Price Index (CPI) which tracks the cost of a “basket” of goods and services that the average Canadian buys regularly.

The benchmark year in which the CPI equals $100 is currently 2002.

Back in 1989 the equivalent was $76.10.  Compare that with today – $136.30.  That means $100 worth of goods in 1989 would cost you $175.30 at today’s prices – 75.3% higher than the average prices 30 years ago.

Regional prices vary widely across a large and diversified country like Canada, so the following table shows average prices for illustration purposes only:

You’ll notice that not all prices have the same percentage increase.

Just for fun, here are some other interesting changes (that really have no correlation the CPI):

The bottom line

Inflation creeps up on us year after year.  It’s easy to underestimate because it’s not that noticeable in the short term. 

But, think about what would happen if your income stayed the same over 30 years, while prices for most basic goods continued to increase.  

The buying power of $100 today would cost you $181.14 in 2049.

Because you would be paying more for your essential goods and services, your disposable income wouldn’t be enough for the discretionary purchases that enhance your lifestyle.

Related:  Stretching Your Retirement Dollars

Inflation is especially important to consider when forecasting your retirement budget.  Smart investors want their savings to at least keep up with, or, ideally, beat inflation.

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