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Deal Fanatic
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Apr 20, 2011
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Its well known in Vancouver that taxes are the lowest in Canada since commercial properties pay for most of it. They want to rebalance that over something like 20 years but it remains that most areas in Canada have half or one third the taxes in the US lol
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Jun 28, 2007
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Archanfel wrote: I am not sure what you are trying to say. Are you saying S&P is lying about their numbers? There's no timing involved. You chose the date (30s-60s) and said the returns were bad in those years. You also said someone couldn't have retired on dividend in 1929. I ran the numbers and showed you otherwise. Both investing and retiring in those years were highly doable.

Let's do it again for the investment scenario and this time precisely on the date you picked from Jan 1930 to Dec 1959. After investing the equivalent of $20,000 each year (e.g. $119.42 in Jan 1930), the couple would have the equivalent of 3.6M by the end of Dec 1959. No timing involved, just purchase S&P 500 at the beginning of every month using their pay checks. Today, you can let the bank do it for you automatically if you don't think you have the discipline to do so yourself. There's no easier way of investing.

If you want, you can choose another date and I will run the numbers for you again. This is not all semantics at all, but hard cold numbers that you can't change.

And again, investing 20,000 each year does not stop you from purchasing your PR.
...the semantics is the point that stocks are risky. Yes, real estate is risky too, especially when its levered. But the biggest risk with stock investing is excessive volatility. The market over the past few days has clearly showed this. While your "cold hard facts" using a backward analysis has certainly shown that consistently investing in stocks over time despite volatility, economic depression, high unemployment, wars etc., can get you ahead, the reality is that people rarely achieve that during certain cycles, and even when there is the option to do it (like now), they don't. Case in point, fund flows into the stock market are falling this year even though it may be a great time to buy.

I should stress that I am not against investing in the stock market. I think retirements should absolutely be funded largely by it. But this discussion that stocks are BETTER than real estate is completely foolish. There are merits (and downsides) to both. Which is why its best in the long run that people are well diversified across all asset classes.

Lastly this whole discussion was started because I said investment returns in stocks (and real estate) really depend on the cycle that you are investing in, because nobody has an investment horizon of 100 years. I have already shown you that the 1970s to 2000 stock market cycle was better than the 1930-1960s cycle both on a nominal and real basis. yes dividend reinvestment improves your return during the 30s but it also does so for the 70-2000 cycle. Those are the cold hard numbers. Its clear from this market today that stocks aren't going to go on a one-way trip up in this cycle. Stocks will likely still be higher over 100 year period and will still provide a better 'absolute' return over the long haul than anything else. But let's not forget that this will come with several years of excessive volatility. Accounting for this volatility (or what the finance text books call a Sharpe ratio), stocks may not give you anything at all and this is the concern I have with having just a stock portfolio. It is also a major reason why institutions have been reducing their exposure to equities over the last few years - they call it "de-risking" for obvious reasons.
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Apr 20, 2011
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Sure gambling in the stock market can produce faster gains than a home however $10,000 a year in Tax Free Savings account deposits doesn't go very far, and you still need to rent a place...
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Apr 11, 2008
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gomyone wrote: ...the semantics is the point that stocks are risky. Yes, real estate is risky too, especially when its levered. But the biggest risk with stock investing is excessive volatility. The market over the past few days has clearly showed this. While your "cold hard facts" using a backward analysis has certainly shown that consistently investing in stocks over time despite volatility, economic depression, high unemployment, wars etc., can get you ahead, the reality is that people rarely achieve that during certain cycles, and even when there is the option to do it (like now), they don't. Case in point, fund flows into the stock market are falling this year even though it may be a great time to buy.

I should stress that I am not against investing in the stock market. I think retirements should absolutely be funded largely by it. But this discussion that stocks are BETTER than real estate is completely foolish. There are merits (and downsides) to both. Which is why its best in the long run that people are well diversified across all asset classes.

Lastly this whole discussion was started because I said investment returns in stocks (and real estate) really depend on the cycle that you are investing in, because nobody has an investment horizon of 100 years. I have already shown you that the 1970s to 2000 stock market cycle was better than the 1930-1960s cycle both on a nominal and real basis. yes dividend reinvestment improves your return during the 30s but it also does so for the 70-2000 cycle. Those are the cold hard numbers. Its clear from this market today that stocks aren't going to go on a one-way trip up in this cycle. Stocks will likely still be higher over 100 year period and will still provide a better 'absolute' return over the long haul than anything else. But let's not forget that this will come with several years of excessive volatility. Accounting for this volatility (or what the finance text books call a Sharpe ratio), stocks may not give you anything at all and this is the concern I have with having just a stock portfolio. It is also a major reason why institutions have been reducing their exposure to equities over the last few years - they call it "de-risking" for obvious reasons.
I honestly don't understand why are you worried about volatility when you are not even going to touch the money for 30 years? And even if you decided to retire, you could only take out 2.5% each year for 30 years, much of that covered by dividends. Whatever short term volatility would be a wash.

You were actually wrong about 70-00 cycle. Let's try another simulation, 1970-2000, same deal, $20,000 in today's dollar each year invested every month with dividends reinvested. You would ended up with $2.37M in today's dollar, actually worse than from 1930 to 1960.

Now, the "bad" number of 1970-2000 cycle wasn't bad at all. The total investment was only $600,000 and it spread over 30 years, so on average they only compounded for 15 years. The latest 30 year cycle was a little worse at slightly less than $2M. This is similar to the 30 year cycle ending in 1940 due to the great depression. I have yet to find a 30 year cycle that give negative returns in real term like RE did. 2008 probably came the closest.

And that's only half of the story. Graduate withdraws further reduced the volatility. Take 2008 for example, the worst cycle I could find at $0.9M. Withdraw 25K/12 (in today's dollar) each month and by Dec 2014, the balance would have recovered to 1.8M despite living on it for 6 years. I suspect the retiree would be just fine going forward.

RE, on the other hand, can give you great returns, and I mean great returns, not the puny 10% or 20% return of stocks, you can get 200%, 300% leveraged annual return easily, but also terrible losses since you cannot spread the purchase/sales date, so volatility actually matters there. I would actually argue the lure there is gambling for massive returns, not the other way around.

It would actually being interesting to run some numbers based on Case-Shiller index for Toronto over the last 100 years. Unfortunately, I can't find it. The US chart looks down right scary and individual properties might do much worse.

Do you really believe you can sell your PR to fund retirement? I love my PR, but I don't believe I could rely on it for a minute. I fully expect not to see a large chunk of what I spent on it ever again. A far better way to fund retirement is via rental properties. I considered it, but the CAP is just too low right now and the tax implication is tricky.
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Apr 20, 2011
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Its extremely rare for people in Vancouver to by rental properties to retire with because the taxes alone would make it a really nasty proposition.

Most people buy the biggest house they can scrape for, and legally rent out up to 50% of it with a small amount of income taxes on the rent, and enjoy the unlimited tax free income whenever they sell the house and trade up or downsize.
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Apr 11, 2008
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popbottle wrote: Its extremely rare for people in Vancouver to by rental properties to retire with because the taxes alone would make it a really nasty proposition.

Most people buy the biggest house they can scrape for, and legally rent out up to 50% of it with a small amount of income taxes on the rent, and enjoy the unlimited tax free income whenever they sell the house and trade up or downsize.
Vancouver is quite different from Toronto and forgive me for saying I don't care since I can't move to Vancouver.
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Apr 20, 2011
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you'd still pay taxes when you deal with those rental properties in TORONTO
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Apr 11, 2008
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popbottle wrote: you'd still pay taxes when you deal with those rental properties in TORONTO
Yes, that's my point. In Toronto, I have no choices. In Vancouver, you apparently have.

However, since the rental properties would be used to fund retirement via rents, not to be sold. Capital gain taxes would be irrelevant until I die.
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Apr 20, 2011
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Its kind of funny to have rental properties to pay taxes on when you could simply buy a house and sell it tax free later. You always have a choice in any city to buy a home and pay notax when you sell instead of choosing taxable investments
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Apr 11, 2008
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popbottle wrote: Its kind of funny to have rental properties to pay taxes on when you could simply buy a house and sell it tax free later.
You really need to read my post before replying. The whole point of having rental properties is to avoid the volatility of the RE market while still generating income stream for retirement. Say the market crashed tomorrow (I know, I know, impossible, but say it happened), you wouldn't be able to sell your house to get "tax free income". But rental property owners wouldn't care since they don't want to sell their properties anyway. Again, Vancouver is different since you can generate income stream from your PR, you can't in Toronto, not legally at least.
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Jun 28, 2007
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Archanfel wrote: I honestly don't understand why are you worried about volatility when you are not even going to touch the money for 30 years? And even if you decided to retire, you could only take out 2.5% each year for 30 years, much of that covered by dividends. Whatever short term volatility would be a wash.

You were actually wrong about 70-00 cycle. Let's try another simulation, 1970-2000, same deal, $20,000 in today's dollar each year invested every month with dividends reinvested. You would ended up with $2.37M in today's dollar, actually worse than from 1930 to 1960.

Now, the "bad" number of 1970-2000 cycle wasn't bad at all. The total investment was only $600,000 and it spread over 30 years, so on average they only compounded for 15 years. The latest 30 year cycle was a little worse at slightly less than $2M. This is similar to the 30 year cycle ending in 1940 due to the great depression. I have yet to find a 30 year cycle that give negative returns in real term like RE did. 2008 probably came the closest.

And that's only half of the story. Graduate withdraws further reduced the volatility. Take 2008 for example, the worst cycle I could find at $0.9M. Withdraw 25K/12 (in today's dollar) each month and by Dec 2014, the balance would have recovered to 1.8M despite living on it for 6 years. I suspect the retiree would be just fine going forward.

RE, on the other hand, can give you great returns, and I mean great returns, not the puny 10% or 20% return of stocks, you can get 200%, 300% leveraged annual return easily, but also terrible losses since you cannot spread the purchase/sales date, so volatility actually matters there. I would actually argue the lure there is gambling for massive returns, not the other way around.

It would actually being interesting to run some numbers based on Case-Shiller index for Toronto over the last 100 years. Unfortunately, I can't find it. The US chart looks down right scary and individual properties might do much worse.

Do you really believe you can sell your PR to fund retirement? I love my PR, but I don't believe I could rely on it for a minute. I fully expect not to see a large chunk of what I spent on it ever again. A far better way to fund retirement is via rental properties. I considered it, but the CAP is just too low right now and the tax implication is tricky.
ugh...this is getting painful:

1930 - 1960: total annualized return after inflation for S&P 500 was 1% (7% if dividends reinvested)
1970 - 2000: total annualized return after inflation for S&P 500 was 5% (9% if dividends reinvested).

5%>1% while 9%>5% (reinvested dividends) so the 70-2000 cycle was better than the 30s cycle in both cases. Again plug the numbers in this calculator to see the outcome. I appreciate your attempt to illustrate a disciplined approach to investing in stocks and why you would have done ok during the 1930s. Unfortunately, this is not true in practice. Excessive stock market volatility scares away investors and in practice, there would have been very few people who would have crystallized the returns you mentioned. Most people only return to the market after the big gains have been had. So the absolute returns you are quoting from the rear view don't often happen for everyone. The recent downturn is a case in point. people should be "in" the market now, but funds flows are showing that more people are exiting. I say this not because I think its right (I work in investment management (fixed income) and my industry is based on convincing people to be buying. That is not always the case though in practice.

Let me just emphasize, you should absolutely rely on stocks (as well as bonds and liquid cash) to fund a retirement. I am not advocating in any way, using a principal residence to exclusively fund a retirement in part because its not a liquid asset. However a owning a private residence is and should be an essential part of anyone's retirement plan. Not only do you need a place to live when you retire, but its absolutely helpful, especially when you eventually own a house free and clear and do not have to pay shelter costs (ie rent). You also do not need to liquidate that house right away to benefit from ownership although you have the option to do so, which also gives you a huge advantage over someone who has just an equity portfolio to rely on.

PS: I just had a quick look at the chart you posted from Shiller on real US house prices. Interestingly, from 1930 to 1960 the real (inflation adjusted) price appreciation for housing was 2% which actually beats the real inflation adjusted average for stocks during the same time period! Someone who owned both assets would be better off than someone who only owned stocks. (Of course, this does not include the reinvested return on dividends for the stocks, but to keep the playing field level, it doesn't included the imputed rent cost savings from housing either.)
[OP]
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May 20, 2015
247 posts
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Scarborough, ON
Well, back then the central bank (FED) made series of mistakes. The new system put into place prevented that from happening again.

However, the recent great reccession also caused a concern, so they put into place something would prevent it from happening again.

Next time, something will come along and it might just be a nuclear crisis
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Archanfel wrote: I honestly don't understand why are you worried about volatility when you are not even going to touch the money for 30 years? And even if you decided to retire, you could only take out 2.5% each year for 30 years, much of that covered by dividends. Whatever short term volatility would be a wash.
PS: Archanfel, you seem like a smart person so I think you would appreciate this paper on why volatility matters in stock market investing. In theory, people should just dismiss stock volatility - but they don't and that affects their ability to benefit from the market as you have characterized.

http://papers.ssrn.com/sol3/papers.cfm? ... id=1782009
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Apr 11, 2008
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gomyone wrote: ugh...this is getting painful:

1930 - 1960: total annualized return after inflation for S&P 500 was 1% (7% if dividends reinvested)
1970 - 2000: total annualized return after inflation for S&P 500 was 5% (9% if dividends reinvested).

5%>1% while 9%>5% (reinvested dividends) so the 70-2000 cycle was better than the 30s cycle in both cases. Again plug the numbers in this calculator to see the outcome. I appreciate your attempt to illustrate a disciplined approach to investing in stocks and why you would have done ok during the 1930s. Unfortunately, this is not true in practice. Excessive stock market volatility scares away investors and in practice, there would have been very few people who would have crystallized the returns you mentioned. Most people only return to the market after the big gains have been had. So the absolute returns you are quoting from the rear view don't often happen for everyone. The recent downturn is a case in point. people should be "in" the market now, but funds flows are showing that more people are exiting. I say this not because I think its right (I work in investment management (fixed income) and my industry is based on convincing people to be buying. That is not always the case though in practice.

Let me just emphasize, you should absolutely rely on stocks (as well as bonds and liquid cash) to fund a retirement. I am not advocating in any way, using a principal residence to exclusively fund a retirement in part because its not a liquid asset. However a owning a private residence is and should be an essential part of anyone's retirement plan. Not only do you need a place to live when you retire, but its absolutely helpful, especially when you eventually own a house free and clear and do not have to pay shelter costs (ie rent). You also do not need to liquidate that house right away to benefit from ownership although you have the option to do so, which also gives you a huge advantage over someone who has just an equity portfolio to rely on.

PS: I just had a quick look at the chart you posted from Shiller on real US house prices. Interestingly, from 1930 to 1960 the real (inflation adjusted) price appreciation for housing was 2% which actually beats the real inflation adjusted average for stocks during the same time period! Someone who owned both assets would be better off than someone who only owned stocks. (Of course, this does not include the reinvested return on dividends for the stocks, but to keep the playing field level, it doesn't included the imputed rent cost savings from housing either.)
The problem is that you assumed that you would have $600,000 to dump into stock in a single go (granted, that's how the conversation started, but it's not a realistic scenario). Even if you had the money, you wouldn't have the TFSA room to do so. To get the correct number, you need to plug in the numbers from Robert Shiller. You can find the numbers here: http://www.irrationalexuberance.com/mai ... rc=%2F#4,0. I suspect the calculator is based on those numbers. Unfortunately, it does not include a dollar cost average option and it also can't do retirement scenarios.

Are you telling me you are worried about 7% vs. 9% real return? Yet you have no problem living with the possibility of a 50% reduction of your home value in real terms?

You will never own a house free and clear, not in the GTA at least. You will have to pay property taxes, maintenance (people recommend budget 1-3%), insurance and utilities. Therefore, you would still have shelter costs. This is especially true for low rises. The CAP rate in Toronto is terrible right now. You can take a look at your own house and see how much you are saving vs. renting. For my house at least, nothing. In fact, I'd say my shelter costs and transportation cost went up due to owning a house.

You kept on ignoring dividends. You can't because that's the whole point of investing for retirement, passive income. Ideally, you shouldn't be selling much in your retirement as my numbers have shown. Granted, it's getting hard now as companies got into a habit of share buyback over dividends, but it's still doable.

A principle residence can't do that for you. It can't even cover all the shelter cost. Again, Vancouver might be different, but not GTA, not legally. Your primary residence is there for your enjoyment, and that's about it. And you have to pay continuously to get said enjoyment. It's basically a dead weight in your retirement as you probably wouldn't need a big house by then anyway and age would make it harder and harder to maintain the property. You either would have lower shelter costs or higher shelter costs that your house wouldn't be able to cover (like nursing homes).

Reverse mortgage would be a way out though, but it would be the banks who rip all the rewards. Unfortunately, I suspect it would be the fate for a lot of today's home buyers who overextended themselves and neglected TFSA and RRSPs. Although I kind of agree with you that for most of people, it's still better than renting and neglecting TFSA and RRSPs anyway. PR is a great way to force save, assuming they don't carry their first, second and third mortgages into retirement.
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gomyone wrote: PS: Archanfel, you seem like a smart person so I think you would appreciate this paper on why volatility matters in stock market investing. In theory, people should just dismiss stock volatility - but they don't and that affects their ability to benefit from the market as you have characterized.

http://papers.ssrn.com/sol3/papers.cfm? ... id=1782009
I wouldn't even go that far. In reality, most people don't invest at all and staff all their money into a saving account hoping the housing market would crash while bitching about how the housing market is not sustainable here. However little they invest would be in expensive mutual funds that charge 3% fees and lose money very year regardless the broader market. Worse yet, they would raid that account every year to buy the latest iPhones. :)

We can run all the numbers for fun, my advice to every young man? Buy the damn PR. :)
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Apr 20, 2011
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Archanfel wrote: A principle residence can't do that for you. It can't even cover all the shelter cost. Again, Vancouver might be different, but not GTA, not legally. Your primary residence is there for your enjoyment, and that's about it. And you have to pay continuously to get said enjoyment. It's basically a dead weight in your retirement as you probably wouldn't need a big house by then anyway and age would make it harder and harder to maintain the property. You either would have lower shelter costs or higher shelter costs that your house wouldn't be able to cover (like nursing homes).
.
Your primary residence is there for your retirement where in any Canadian city you can legally sell it and take the gains tax free without messing around with registered instruments and gambling on the stock market.
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popbottle wrote: Your primary residence is there for your retirement where in any Canadian city you can legally sell it and take the gains tax free without messing around with registered instruments and gambling on the stock market.
Again, you would be open to short term volatility of housing market, the currency market, inflation and the whole bucket load of problems associated with selling your life savings in a single shot. The idea for retirement savings is that you can unwind slowly as needed or better yet, just live on the income stream.

Think of it this way since you clearly have a problem with investing in the stock market, say you are still bullish about the RE market when you retire and you can rent out your coach house for $2000/month which would cover your living expenses, would you sell you house or would you continue to milk it and hopefully leaving it to your children? Now, instead of a house, say an investment portfolio can give you the same thing, only higher income stream tax free, what would you do? Unfortunately, a PR would not give you an income stream in Toronto, so an investment portfolio would be our only choice.
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Jun 27, 2015
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Brampton, ON
LandKing wrote: ?? Cash has tremendous volatility

Cash has dropped more than 20% in value over last year
The Dollar has dropped relative to the US dollar by that much but the purchasing power within our borders has not dropped by 20%. Otherwise our inflation numbers would be sky high

Also, if you are going to look at it this way, then the return on RE has actually been negative the last couple of years.
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triggerhippie wrote: The Dollar has dropped relative to the US dollar by that much but the purchasing power within our borders has not dropped by 20%. Otherwise our inflation numbers would be sky high

Also, if you are going to look at it this way, then the return on RE has actually been negative the last couple of years.
Our purchasing power has greatly diminished... Why do you think items like groceries, gas, and other products have increased so much?

Inflation is not as high due to actual cost of some of the goods declining.. But our purchasing power definitely has declined substantially.

We import majority of goods in USD...cdn dollar falling by that much against uad and yuan definitely has substantially decreased purchase power

In next spring prices will skyrocket a lot more since goods purchased are usually changed twice a year from suppliers... If you want a preview..go shop at Costco and see everything from berries to cereal to froxen foods having gone up 20+% since last year since Costco has much more real-time pricing due to currency since they change up their product mix so fast and have lots of own product

E.g. froxen strawberries was 9.99 last year..its 12.99 now...frozen mangoes were 8.79 last year..its 11.99 now...breakfast sandwiches were 11.99 last year are now 14.99

For items like clothing and other goods at stores..the inflation and price increase will be dramatic as new contracts and prices takeover that will account for lower dollar
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Apr 11, 2008
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LandKing wrote: Our purchasing power has greatly diminished... Why do you think items like groceries, gas, and other products have increased so much?

Inflation is not as high due to actual cost of some of the goods declining.. But our purchasing power definitely has declined substantially.

We import majority of goods in USD...cdn dollar falling by that much against uad and yuan definitely has substantially decreased purchase power

In next spring prices will skyrocket a lot more since goods purchased are usually changed twice a year from suppliers... If you want a preview..go shop at Costco and see everything from berries to cereal to froxen foods having gone up 20+% since last year since Costco has much more real-time pricing due to currency since they change up their product mix so fast and have lots of own product

E.g. froxen strawberries was 9.99 last year..its 12.99 now...frozen mangoes were 8.79 last year..its 11.99 now...breakfast sandwiches were 11.99 last year are now 14.99

For items like clothing and other goods at stores..the inflation and price increase will be dramatic as new contracts and prices takeover that will account for lower dollar
I suspect the price has already skyrocketed. Everything I buy went up in price. Take Surface pro 3 for example, it was $849, now even the end of life sales price is higher. But the government kept saying the inflation is low. I don't know what those people measure.

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