We’ve heard the numbers – a lot.
Inflation is running at about 7% – the highest rate in 40 years. “Transitory” was the word first used to describe it, but this past November, Fed. Chairman Jerome Powell stated, “I think it’s probably a good time to retire that word.”
Fair enough, let’s retire it – but what will the impact of this non-transitory inflation spike be? For those of us who are thinking about our long-term financial future, what should we do to compensate – and just how much compensation is required?
Current consensus seems to be that inflation will return to a more normal rate (that is, 2-3%) some time in 2022 – but what if, like “transitory,” that’s also wrong? Let’s run some numbers and see what this spike may mean in terms of our ability to save for the future.
Below is the financial trajectory of a 48-year-old person who’s preparing to stop full-time work at age 62. As you can see, they’re projected to have about 200k saved at age 90 – a pretty comfortable cushion:
BUT – in this model, we’ve set overall Inflation at 3%, meaning both income and expenses will rise, on an average, 3% per year.
Now let’s build in a 1-year, 7% spike in inflation for expenses. That sustained 1-year rate of 7% has wiped away $130k in savings over the next 40 years.
Now let’s see what happens if the spike in expenses lasts 2 years. Our 48-year-old’s cushion has vanished, leaving them with an $80k deficit after just 2 years of our current inflation rate. 
Obviously this is HUGE, and maybe a little disturbing – but is it the whole story?
First, let’s look at not just the past 40-years, but at the past 50: