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Military Finances 101: If Inflation is Coming Down, Why is Everything Still so Expensive? Thumbnail

Military Finances 101: If Inflation is Coming Down, Why is Everything Still so Expensive?

Managing Your Finances

According to the Fed, inflation is coming down. But if that is the case, why are things still so much more expensive? If you've been around the military for a while, you may have seen the situation where the defense budget is cut, but spending goes up. How does that work? In Congressional budget talk a cut is a reduction in the planned increase...not like when you cut your expenses (or even worse, your squadron gets a cut in flying hours). A reduction in inflation is a reduction of the rate at which things become more expensive. But the bottom line is that they're getting more expensive.

Eggs at the Commissary are Almost Double What They Were. How Could Inflation be Coming Down?

It's important to keep in mind that the inflation rate we hear on TV is the Consumer Price Index (CPI). The CPI (or more correctly the CPI-W) is a weighted average of goods and services. Food makes up about 13.4% and Energy is 6.9% of the weighting. Everything else is weighted at 79.6%. So, if food or energy goes up a lot but everything else is pretty stable, you could be getting killed at the Commissary, but the CPI could be low. Let's look at an extreme example.

  • From year 1 to year 2, food prices go up by 50%
  • Over the same time period, everything else (including energy) goes up by 1%
  • The CPI would be about 3.8%

Even though the hypothetical CPI is reasonable, your wallet is crying every time you see the bagger

The Human Mind isn't Programmed to Understand Compounding

The human mind is pretty linear. I guess we didn't really need to understand compounding to hold off saber tooth tigers. That makes it hard for us to visualize the effects of on-going inflation. I'm an example. I work with compounding every day. I also bought a pickup in 2004 for about $30,000. When I think about replacing it, I think a replacement should cost around $40,000. The reality is at about 3.6% inflation a replacement truck will cost $60,000+. Now let's apply compounding to recent inflation.

  • At the end of 2020, a basket of goods cost you $100
  • 2021 inflation was 4.7%. Your basket of goods now costs you $104.70
  • 2022 inflation was 8%. The same basket costs $113.08
  • 2023 inflation was 4.1%. Now we're up to $117.12
  • It looks like inflation for 2024 will about 2.7%. By the end of the year (if we're not already there) the cost will be $120.89

That is an increase of 20% over the 4-year period. And that assumes that food prices didn't go up faster than the other components of the CPI.

Inflation Can Really Affect a Retirement Plan

In the example above, things become 20% more expensive in just 4 years. Stretch out that time period for 20 or 30 years and the effect can be astounding. That's why it is important account for inflation in your financial plan and make sure that it reflects inflation that did occur (not what you projected).

Military Finances are Different

Every American has to deal with inflation. Not every American has the option to select a lifetime of inflation adjusted income for their surviving spouse. If you're an Active Senior Military Officer or NCO that is getting ready to retire, that's why we think you should think very carefully before you turn down SBP. And that is one of the reasons that we think Active and Retired Senior Military Officers and NCOs should work with a financial planner that understands your unique military and veteran benefits. If you like to see how we work with people just like you, use the button below to schedule a free, initial consultation.

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