We went to Target the other day for groceries and the bill came to $150. As we walked out to the Jeep to bring things home, my wife said, “I don’t even know what things are supposed to cost any more. Was that a good deal or did we overpay by a lot?”
I agreed that inflation – year after year after year – begins to warp our understanding of what things should cost. Especially lately, as prices are going up more quickly. The overall CPI is up more than 5% and ABC’s Good Morning America reported last week that Thanksgiving Dinner foods were up 14%.
When prices are moving that quickly it’s easy to lose track of what is a good value and what is not. Truth is that I pay less attention to what things cost now than I did when we first got married and needed to live a thriftier lifestyle. I still have a “reference price” context of thirty years ago for many things, which isn’t helpful after 3 decades of government debt-fueled inflation.
As a rule of thumb, I proposed to my wife that we simply cut the prices in half in our mind and check and see if that would have seemed reasonable to us in the past. After all, there has been almost exactly 100% inflation since we got married in 1990. It’s the perfect time to use a 2x factor (until next year!).
For example, a movie ticket might be $12 now – which seems very high – but would have been a very ordinary $6 back in the day. That makes the new price seem more reasonable. A gallon of milk was $2.50 back in the 1990s and now it is close to $4 – actually a good deal, historically. A shirt at a department store that is $60 today, would have seemed typical at $29.99 back in the 1990s. That quick comparison helps the new prices make more sense to me.
To kick it up a notch, my new Jeep Wrangler was $42K, but that’s not crazy considering we paid $28K for a new Honda Accord back in 1996. In fact, a brand new Honda Accord in 2021 comes in at $43K – almost perfectly matching the 68% general inflation over the last 25 years. It’s amazing how closely some things track over decades, isn’t it?
Like anything, the value of a price is completely in the eye of the beholder. The problem is just that we have “old tape” that we’ve been using to judge things, which makes everything look expensive. Hopefully, our 2x 1990 rule-of-thumb will help us get a feel for things again. Otherwise, even though we have more discretionary spending power than ever, we’ll be increasingly disappointed every time we go to buy something.
Have you adjusted well to years of inflation, or does everything seem too expensive compared to what it once was?
MrFireStation 
The government’s measure of inflation CPI has been low balling inflation for years because it leaves out expense items that are major cost drivers in our households. Real Estate, College Education, Health Care and Taxes are the big cost drivers.
Low balling inflation allows the government to capture more of your pay raises as taxes. I saw an article a couple weeks ago that showed the new 2022 tax brackets and standard deduction had been adjusted the most in over 30 years at around 3.1%. The problem is that inflation, as measured by the government’s low ball method was over 6%. I read another article about Social Security payments are increasing 5.9%. The Medicare Premium increased $148.50 to $170.10, which is a 14.5% increase.
See how this works. The government uses a low ball number for calculating inflation and probably gets the number right when it comes to grabbing more of your money.
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Chief, sorry, forgot to answer your question about how my household is dealing with inflation. We bought our house in 1989 and have paid down our mortgage and never have taken money out of it. Proposition 13 has limited the rate of increase in Real Estate Taxes to 2% per annum. With today’s cheap mortgage money, the carrying cost of our house has gone down and down.
It is going to be much more difficult for our children getting started.
There is one cost that has gone up by a lot since the late 80s, namely taxes to the point they are our household’s number one cost item, by a lot. An educational question I sometimes ask people, “What is your household’s most expensive cost?” Most incorrectly answer their mortgage or rent. I then walk them through a mental accounting of all the taxes they pay. An example of the contrast between the late 80s and now is that during the 80s I earned enjoy that I capped out Social Security withholding about half through the year and got a pay raise for the second half of the year. This hasn’t happened since 2000.
Low balling inflation measurement and the resulting low ball bracket adjustments and income phaseouts for credits that are not adjusted for inflation cause additional tax slippage.
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Consumer inflation is up 2.25x since 1988. It’s sometimes hard to figure out how much things ‘should’ cost in my mind with all of that inflation.
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Agree – I guess it’s no surprise that when they make up a measure and they then make sure it benefits them most!
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This is a really good point. I’m definitely too hard on myself about the price of lots of things because I remember when things were a little cheaper. Instead of assuming companies are price-gouging and taking advantage of me I should probably take inflation into account first :). A good reminder.
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Especially things that we buy at retail … Target, Walmart, etc. it’s unlikely as competitive as those stores are that anyone is really getting gouged!
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I understand that things can cost more over time, but also I think this run-away inflation has gotten out of control. It has to start somewhere, and I think many of these companies and suppliers are raising their prices even when they might not have to just to jump on the band wagon and cash in. I mostly keep a fight back attitude and depending on the situation will just buy less of something or less often, or even cut it out completely. It also motivates me to learn how to fix more things myself. Many times its more about the principle than whether I can afford it or not.
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Part of what happens when inflation surges is that businesses need to cover the risk of their own costs going up further. They take extra pricing if they can get it, because raising prices can be very difficult. Then, that leads to more inflation. It’s a coordination problem.
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