Holy moly, the CPI (consumer price index) increased 6.8% for the 12 months ending in November. That’s the largest increase in almost 40 years. I never faced this kind of inflation in my adult life. Many of you probably haven’t either. Since I graduated college in 1995, inflation has been around 2-3%. It was manageable and we became used to it. Most years, we could increase our income and overcome inflation. This enabled us to grow our wealth through saving and investing.
2021 is a bit discouraging. 6.8% is a huge headwind. Could we increase our income that much? The problem applies to wealth (net worth) as well. It needs to beat inflation and 6.8% is much bigger than I’ve ever seen. The price of most items increased over the last 12 months according to the CPI summary from the U.S. Bureau of Labor Statistics. It’s pretty scary and could become a big issue if high inflation persists. Is it time to panic? Well, I don’t know. Let’s take a look at our spending, income, and net worth. I have a feeling, 2021 wasn’t going to be as good as past years.
Spending
We all felt this one coming. The price of gasoline, food, rent, and everything else has been going up this year. However, inflation is different between categories and locations. Everyone is feeling the effect of inflation differently.
Here is a chart I made from the CPI data.
Wow. Maybe I should remove Gasoline and used cars. Those two categories made everything else look small. The only anomaly here is the airline fare. I just got my ticket to Thailand and the price was very reasonable. Okay, let’s dive in a bit further to see how inflation affected our Big 3 – housing, transportation, and food.
Housing
We haven’t felt a huge hit on housing. Our mortgage remained the same. Our property tax increased 9%, but I blame that on Portlanders who never met a tax bill they didn’t like. The utilities were a mixed bag. The electricity and water bills haven’t changed much. But the natural gas bills increased about 30%. That’s about $30/month more in the winter.
We are paying more for housing, but the increase isn’t too bad if we exclude property tax. Fortunately, we could absorb $30/month extra for cooking and heating (natural gas). It’ll be tougher for people in the lower-income brackets, though.
Transportation
Gasoline price increased an incredible 58% from last year. Yikes! I’m sure almost everyone noticed this. Fortunately, we drive very little. I usually fill up just once or twice per month so the increase hasn’t hurt us too much. We probably spend about $20/month more on gasoline. That isn’t too painful.
Although, we plan to drive down to California this Christmas. This road trip will be more expensive than previous trips due to inflation. It’ll still be worth it to see families during the holidays. Fortunately, I don’t plan to buy a vehicle anytime soon so we don’t have to deal with higher vehicle prices yet. That seems like a huge hassle.
Food
Food price inflation is very noticeable as well. Most items at the grocery stores have gone up in price. Many products also come in smaller containers.
The most noticeable change is beef, as the CPI data indicated. I used to buy beef occasionally, but I haven’t purchased any steaks since last year. Even ground beef is more expensive now. Fortunately, chicken and pork haven’t increased in price as much. Although, the CPI reported that pork index rose sharply last month. We’ll probably see pork prices increase very soon. I did find a sale on beef chuck roast before Thanksgiving and purchased a big piece. It was a great deal at $4 per pound.
Our grocery spending hasn’t increased much, probably around 6.4% as the CPI reported for food at home. We shifted our spending around a bit and avoided the most egregious inflated products – beef.
Eating out has been more expensive as well. Every restaurant increased the price of its offerings. That’s understandable because of the increase in labor costs and ingredient prices.
All in all, our cost of living increased more than usual. Normally, inflation is barely noticeable. Luckily, I think we fared pretty well compare to many families. We don’t drive much and our housing expense is relatively stable. Our food spending is higher, but we shifted our spending to less inflated categories. We avoided the worst bits of this inflation storm so far and our cost of living hasn’t increased that much.
Income
Here is the biggest problem with inflation. You need to make more money just to keep up. So did you earn 6.8% more this year? If the answer is no, then you’re falling behind.
Mrs. RB40 got a cost of living adjustment and a raise earlier this year. According to my records, she made about 7% more in 2021. That’s right in line with inflation. Normally, a 7% raise is good, but it’s barely adequate this year. Most employers just had their annual reviews in November so I guess we’ll see how generous they’ll be soon. Hopefully, she’ll get a good raise.
My income increased about 20% this year, but that’s because I hustled a lot more than last year. I charged over 3,500 scooters this year to offset the decrease in my blog income. It worked, but I am worn out. Unfortunately, working more isn’t sustainable. I don’t want to keep working more just to keep up with inflation. Next year, I plan to work much less and make less money.
Lastly, our passive income stayed about the same as in 2020. There are several reasons for this. Our rental income decreased because we had a large repair bill. Dividend income also decreased a bit because some companies cut dividend payments. Come on, Disney! When are you going to start paying dividends again? 2021 was a tough year on the passive income side for us. I’m hopeful that next year will be better.
Our income increased more than inflation, but we both worked more this year. It’ll be hard to repeat next year.
Net worth
As for the net worth, we’re up about 10% this year. That’s pretty good for a normal year with 2% inflation, but 2021 isn’t normal. Inflation is nearly 7% this year so the real gain is just 3%. I’m happy we made progress, but I’m also a bit disappointed with the magnitude. My target for annual net worth gain is 10%. This goal is inadequate with high inflation. I’ll probably tie the net worth goal to inflation from now on. Maybe 7% + inflation or something like that.
*Sign up for a free account at Personal Capital to help manage your net worth and investment accounts. I log in almost every day to check on our accounts. It’s a great site for DIY investors.
Is it time to panic? What can we do?
The big question now is if we should change our behavior to adjust for higher inflation. Should we panic and expect higher inflation in the coming years? Unfortunately, inflation is kind of a self-fulfilling prophecy. If you expect high inflation and act accordingly, then inflation will be higher. For example, you think a used car will continue to get more expensive so you go out and buy it ASAP. When everyone thinks like that and rushes to buy used cars, the supply will diminish and the price will increase. There are other reasons too. Workers expect prices to rise so they demand more pay. Companies think costs will increase so they increase the price for their products. It’s bad to expect high inflation.
I’m still hoping this high inflation period is transitory like the Fed said. Once the supply chain works itself out, inflation will return to a more reasonable level of 2-3%. We don’t need to buy any big-ticket items so we won’t affect the consumer market much. On food, we’ll probably minimize beef consumption for a while and wait for the price to stabilize. Fortunately, I can cook all kinds of food so we don’t need to buy beef that often. We need to eat more vegetables anyway.
On the income and net worth side, we’ll continue to save and invest as usual. As long as we put our savings to work, it should be fine. Companies are making money hand over fist because American consumers are spending like crazy. In conclusion, continue to invest. Don’t just put your savings in the bank because it’ll lose value due to inflation. Stay the course and we’ll get through this.
It isn’t time to panic yet. Let’s see how 2022 turns out. If inflation keeps increasing, then maybe it’ll be time to figure out a new strategy. For now, let’s breathe and stay calm.
Have you been spending more due to inflation? Are your income and net worth keeping up with inflation?
Image credit: Julian L
Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects across the USA so check them out!
Joe also highly recommends Personal Capital for DIY investors. They have many useful tools that will help you reach financial independence.
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Inflation is a tax for everyone and hurts lower and middle class the most.. In India where i grew up, inflation always used to be double digits, so people invested in property and assets than cash.. USA had inflation in college education but the first time seeing it in food and basic things.. everything is expensive now from home to gas to eating out to groceries. Bringing it back to 3% will be difficult.
i can attest that wine prices are probably up 10% for the same bottles i was buying a year ago. food seems to cost more, especially some of the cheap stuff we used to buy like paper plates or condiments. it adds up but like your family doesn’t affect us too much. we’re still buying the same items and just paying more.
We are comfortable financially so we can handle it. It’s much more difficult for lower-income families, I think.
Interesting, is 6.8% really that high? Where I’m from we’ve had 6% inflation as our low inflation for the past 10 years. Prior to that it was usually 10%, and at some stages 15%-20%. High inflation rates aren’t great when you pay capital gains taxes since its mostly just taxes on inflationary growth.
But interest rates and bonds might become interesting again (not if you already own them, then they’ll hurt), but at least we’ll see some interest rates again.
Whats the worry at 6.8%? That it goes up higher? Or stays like that for a while? Wasn’t it higher in the 1970s at like 10%+? I suppose money printing isn’t such a good thing or does the US still think MMT is a good idea?
Anyway,at least the divis should go up =).
It’s high for us. 6.8% is 2 to 3 times our usual inflation.
Interest rates are starting to increase, but we’re still getting nearly 0% from the bank.
The worry is that our investment can’t keep up with inflation. Our investments did well this year, but stocks seem overpriced.
If stocks go down while inflation is high, then you lose a lot of future spending power.
Maybe I should stay in Panama until this inflation period passes! 😉
Seriously though, I’ll be interested to see how long this sticks around. Right now, the economy is good so it probably evens out a little more (stock earnings, companies dishing out higher wages for workers, etc.). If we lose that side of things though and inflation is still ramping upward, that could be a big deal.
I’m sure most people are worried too. Hopefully, the higher inflation will be transitory as the Fed expected. But you never know.
Higher wages, prices, and earnings will drive inflation higher from what I understand.
“Our property tax increased 9%”
And I thought property tax increases are supposed to be capped at 1% per year. No?
No doubt there’s a lot of rampant Inflation Hustling going on right now … Unscrupulous businesses just taking the opportunity to raise prices even though they don’t need to. So watch your bills (especially if you have Autopay) and fight back where you can.
Our auto insurance premium rose by 14%! Our homeowners insurance premium rose by 22%! The cost to winterize our sprinklers increased by 30%! Waste Management raised our prices by 20% (I had to call them out to get them to back down to 4%). Those are obscene numbers.
Even more insane is that savings account interest rates are still hovering at ~0.5% (at best).
The 1% cap on property tax increases is a California thing. I don’t think OR or most states have the same limit.
Our property tax should increase around 3% every year if there are no new taxes. However, Portlanders voted in a bunch of taxes last time. Hence, way higher property tax this year.
Our insurance hasn’t changed much. I’ll double-check the bills. Thanks!
Yeah, the interest rates at the bank are super low. You could buy I-bonds and get 7%.
We haven’t felt much of the effects of inflation yet. Like you, not driving much, not needing to buy a car, and not eating as much beef makes our personal inflation not too bad. Owning a home is also good because our mortgage stays the same – we don’t have to worry about increased rents.
When I started my blog in 2006, I modeled for 3.5-4% inflation. We’ve had 15 years at about 2.2% inflation. As I was telling a friend the other day, prices could double overnight and we’d just be where I thought we would have been years ago. Maybe we got too used to low inflation. Maybe the gas comparison to the time of shut down (so much supply and no demand) isn’t fair.
I understand that this could be a very big deal for some people. I hope that they have stimulus checks and perhaps child tax credits to offset the difference.
Good point about 2% inflation. We had a great run. We’ll see if the Fed can lower inflation back down a bit over the next few years.
I hope so. I like 2-3% inflation.
I personally think the fed is underreporting inflation. The problem is the CPI can be manipulated by what you include in that basket of goods they use to come up with inflation.
I read somewhere that if the same basket of goods was used since the beginning the inflation would be reported as 14%.
Energy use, housing, gas and certain common food items have been curiously ommited from the current basket. It serves the fed to underreport because it doesn’t have to pay out as much in COLA formulas etc.
The government has been backed into a corner. It can’t raise interest rates because of would make its own debt not serviceable and it has to continue to print money for all these stimulus packages
I’ve heard about that, but I don’t know the details. From what I understand gasoline is included in the CPI.
Yeah, it’s time to pull back a bit on government spending.
The government did not “omit” energy use, housing, gas from the “current basket”.
There are different measures of inflation and some do / don’t include different things. Nothing has changed in the reporting system.
Gasoline is one item that fluctuates a lot do to various things (opec, war, refinery fire, various other excuses) so its not in some measures.
There have been people claiming that inflation is not measured right for many years but its either just opinion or not backed by actual data.
Yes, USA will have low rates for a long time because of debt and yes they are undercounting inflation it feels like 12-15%
My main purchase is food. I just haven’t seen an increase, though we don’t eat beef often and when we do it’s from our freezer. I just paid $2.70 for regular in Colorado. That’s not expensive. Last year was unusually cheap since the world economy had stopped. Anyone should always assume fuel (heating oil, gas, etc) will go up and down. I always have relatively fuel efficient vehicles. People in big SUVs complaining at the pump is kind of funny.
My friends in Argentina and Mexico laugh at the drama we have over these increases. They have this routinely much worse than we do. We’re pretty whiny sometimes.
I’m sure my HOA will go up $20 for heat this year, but that happens every two years anyway. it’s more than double when I bought this place 20 years ago. I did go back to work recently, part time, just for an experience and something to do. I’ll do it six months or so. If we do have rampant, horrible inflation one day it’s nice to know someone will gladly hire me. I applied at four places and only one responded. Employers can complain, but their HR units aren’t responding to applications. Keeping work skills sharp in case of bad times was part of my FIRE plan. This little job helps in that goal.
Thanks for the update. It sounds like you are doing quite well. It’s a great idea to work a little bit.
I’m surprised you haven’t seen an increase in food prices. I notice it on almost everything. Not much, but noticeable.
It’s never time to panic 🙂 I have a strong play in TIPS and I-bonds that are keeping up with the rate or beating it and I’m not concerned at all. That’s why we’ve saved all this money and put ourselves in the position of FI – so we don’t have to worry. If you ever get to a point of “panic” with the amazing financial situation you’re in, I imagine the average American will have already gone insane 🙂
All great points! I’m planning to move some money ton I-bonds before the end of 2021. It’s a great place to stash some money away.
You ask, “Have you been spending more due to inflation? Are your income and net worth keeping up with inflation?”
No doubt I have been spending more due to inflation. Like you, however, I drive my cars very little so I seldom look at gas prices although I know the prices are higher. The prices at practically all the restaurants I frequent in Edmonton and Vancouver are higher, and much higher in increases than reported by sources that publish inflation figures. Of course, my utility bills, house tax, house insurance, and car insurance are higher.
When it comes to regular income, it is lower by about a half for 2020 and 2021 than it was from 2014 to 2019. But those 6 years were very good years that allowed me to save a good deal of money. Most of the savings were invested in dividend stocks of companies that provide “needs” and not “wants”. I am confident that the stock prices and dividends of these companies will bring returns that are well above the inflation rate, regardless of what the inflation rate is. This is certainly true for 2021 so far.
You’re positioned very well to weather higher inflation. Your investments are stable and you can continue to save.
It’s great to be prepared.
I’m not panicking just yet. Yes, inflation is running a little hotter than usual, but stock earnings are up, and my dividend income. Most of the things I spent money on in 2021 only went up a little bit. Very little beef and no cars for me!
Personally I don’t think the Fed is going to let this continue very far into 2022. The odds are very good that interest rates are going to rise, and cool off inflation. This will probably have a negative effect on stocks….
So invest accordingly! Cheers!
I agree with you. The Fed has been talking about pulling back support. Stocks probably will hit another bump, but it’ll be a good opportunity for long-term investors.
Adjusting spending sounds like a good first step … I am seeing some postings on how to adjust your investment strategies for higher inflation….? … like buy more rental properties and or … more less sensitive to inflation stocks or index funds … ? Any thought on this ….?
I need to research more on investment strategies for higher inflation. Investment residential properties are great because rent will increase along with inflation. Not sure about offices and other kinds of properties. Personally, I think index funds are good too. Companies are making more money and generally beat inflation. We’ll have to wait and see. For now, I’d stay the course. Hopefully, the higher inflation is just transitory.