What’s the impact of inflation on a yield comparison decision?

November 24th, 2008 · No Comments

While doing a bit of recent PF blog reading, I came across a statement on GetRichSlick that made me realize I had forgotten to mention one important aspect, given the current economic climate, about a recent decision my wife and I had come to regarding paying off our auto loan early.  I’m talking about the idea that “the debt will simply inflate itself away“.

While I agree with RichSlick’s main point that inflation is very likely to rise in the near future, I’m not certain that it would rise enough to zero out, much less move to a negative value, the interest rate we were paying on the loan.   (I will admit in advance that I don’t have much to base my inflation rate assumptions on here. BTW, inflation is important to consider because it means you’ll be paying off your debts with dollars that are worth less than they are now.)  Anyway, yes, I understand that lowering the real rate at all makes it far easier to beat that rate by investing the pay-off money instead — crossing that zero-interest point would be just HUGE in that regard.   I guess I just don’t think everything can be decided purely on interest rate when you’re talking about the human mind, and believe me, you’re hearing this from someone who puts a lot of faith in numerical analysis!

What I’m referring to, and probably didn’t say strongly enough in the original post, was the need to experience the feeling of a recent, clear “win” to help balance out some of the emotional aspects of the drubbing our market investments have taken in the last 12 months.   In our case, I think this has already helped both my wife and I to avoid crawling into an “all-cash” shell from which we don’t look out for a very long time.  In fact, I know that it has helped us keep our head up and look for opportunities — whether in regards to our 401k, brokerage, or other forms of investing — because we’re again talking about what to invest in, rather than what to sell.

But this is somewhat of a special case for me.  Normally, I’d expect that inflation’s impact on the potential return of two actions would play a larger role in the final decision.   Especially if one had high confidence, like you might now, in the direction of the rate of change of inflation.

Tags: Loans · Personal Finance

  1. There are no comments yet...Kick things off by filling out the form below.

Leave a Reply

XHTML: You can use these tags: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

 Subscribe in a reader