Financial Lesson:

Inflation Isn't Predictable and Future Costs May Surprise You.

Were you surprised at how some things (such as groceries) have actually decreased in cost over time? I know I was.

The takeaway here is that though inflation causes overall prices to rise, in real terms, certain categories of goods tend to get cheaper over time.

Why?

Technology tends to get cheaper because of agents such as innovation, economies of scale, and competition.

Grocery costs have dropped overall due to agricultural expansion, exports, and an increased use of technology, among other factors.

However, other goods and services can increase by a shocking amount. Harvard tuition and nursing home costs are two examples. In those cases, factors such as increased demand and societal shifts caused them to increase much more than overall inflation.

What does that mean for us?

Bottom line, we need to take a hard look at how we account for inflation in our financial strategies. It's not good enough to bake in a fixed rate of inflation, when critical categories such as healthcare or housing may increase substantially more than the average over time.

That's one of the many reasons why we test a variety of assumptions in our models and build alternate scenarios to help ensure our clients are prepared for future price increases, even when they are unexpected.

Have questions about how rising prices could affect your financial future?

Give our office a call. We're here to help.