At FutureAdvisor we’re excited about the opportunity to have a conversation around how to invest well. This post is part of a series about general thinking about investing.
We were talking about inflation the other day with a client, and found ourselves with pen and paper drawing rectangles increasing wildly in size. Are those scales right? How much will the lifestyle they live today actually cost in 2040?
That seemed like it might be interesting to visualize with real data!
What would happen if the same inflation that happened in the 29 year period from 1982 to last year happened in the next 29 years?
We took data from the U.S. Bureau of Labor Statistics and calculated a “cost of lifestyle” for 2040.
We decided to focus on spending only in the eight most important categories. We weighted the spending relative to income using the CPI’s relative importance score. Then we calculated the rate of inflation for each category in the 1982 to 2011 period, and let each category grow at the same rate from 2011 to 2040 to see how much a comparable future lifestyle might cost. For reference, we also added price tags on individual items like houses, cars, bread, and insurance premiums.
Our takeaway? Inflation is one of the most important reasons to invest, because cash loses its buying power so much with time.