CPI

This is my post for the Canadian Tour of Personal Finance Blogs.

For those of you unfamiliar with CPI (Consumer Price Index) you might want to check out the following link for a definition before reading the remainder of the post.

http://www.bls.gov/cpi/cpifaq.htm

There has been some debate amongst both professional and amateur investors/advisors about the validity and accuracy of CPI (consumer price index). Some people argue it’s too low, while others argue it’s too high. There are many highly educated, respected and experienced economists on both sides of the fence, and quite frankly I’m happy to leave the academic arguing to them. The purpose of this post isn’t to further the argument one way or the other but simply to point out that regardless of which side of the argument you’re on inflation pressures should be a factor in your retirement planning. Inflation is an important consideration by anyone considering retirement, but especially those considering early retirement as they have a longer time horizon to consider. Do you remember what a dollar bought you 20 years ago compared to today? What do you think a dollar is going to buy you in another 20?

Those who argue that the published CPI number is higher than it should be usually base their argument on the fact that the basket of goods used to calculate the CPI either aren’t used by everyone or that the basket does not account for substitutions ie- if bananas go up you buy apples, chicken instead of steak etc...I believe there is some validity to this argue (depending on your consumption habits), but I would not base my retirement on it. Although you might not feel the full percentage effect that CPI indicates I believe that as an investor aspiring for early retirement it would be prudent to use the CPI figures as a minimum guide or benchmark when making predictions of future cash flow requirements. Nobody can predict the inflation rates of the future but for those of us who plan to be retired for 40+ years no amount of substituting or cutting back is going to insulate us from some percentage of real daily inflation in our lives. I don’t think that I’ll feel the full percent effect of CPI but I’m going to use the published CPI figures in my planning as a safety cushion...just in case.

Canadian CPI Figures
American CPI Figures