Why does a shilling bun cost more than a shilling?

Walking past a bakery in Bergen, Norway today, I was consumed by the sweet aroma of hot cinnamon.

In to Baker Brun we went, to buy a Skillingsbolle, described as ‘the all-time favourite Bergen treat’ with a name originating from its original price of one shilling. In fact, the word ‘shilling’ itself derives from the Old Norse scilling meaning ‘division’, and was a division of the old Norwegian Rigsdaler.

CinnamonBuns

Of course, the price has increased somewhat since 1893. Today, 123 years later, we paid 29 kroner (about $4.65 AUD). Or considerably more than a shilling, in other words.

The sustained increase in the price of goods or services over time is known as ‘inflation‘, and is something most books on early retirement, or even financial planners assisting their clients in preparing for traditional retirement, warn about.

How does inflation reduce the purchasing power of money?

The book Retire Richer Younger by Melbourne-based financial advisors Barbara Smith and Ed Koken has similar content to the superb Your Money or Your Life, but is targeted at an Australian audience. One chart that stood out to me was the one which shows how inflation reduces purchasing power of money.To summarise: between 1981 and 1988 (7 years), $10,000 from 1980 dropped about half its initial value to around $5,000.Between 1989 and 2008, however (20 years), that same $10,000 from 1980 dropped only from its 1988 value of $5,000 to $3,000.In other words, while by the end of the 7 years between 1981 and 1988, money retained only 50% of its purchasing power, in the 20 years between 1989 and 2008, it retained 60%.

Had there been a similar trend between 1989 and 2008 as there was between 1981 and 1988, we might expect that money would have halved in purchasing power between the years 1989 to 1996 (7 years) from $5,000 to $2,500, and then halved again between 1996 and 2003 (another 7 years) from $2,500 to $1,250, and then proceeded to halve once more over the period 2003 to 2010 (yet another 7 years) from $1,250 to $625 – a mere 6.25% of the original $10,000.

But it didn’t.

While the chart is very steep between 1980 and 1988, it almost flattened after 1989.

This is, I believe, explained by the fact that while inflation was indeed high in the 1970s and 1980s – averaging 6-10% (as can be seen by the almost $1,000 a year drops in the purchasing power of $10,000) in the 1990s and 2000s, after the introduction of the inflation target of 2-3%, it decreased significantly. (Things went a little haywire around the GFC though!). Currently, inflation is even lower – generally, we’re not even reaching the target.

So the key message here is: be alert, but not alarmed. Inflation is important and must be taken into consideration, but you should check the assumptions behind any advice carefully. Any author or financial planner who assumes that we are going to return to the ultra-high inflation days of the 70s and 80s and uses figures from time spans that include these years, rather than looking at the dates following the inflation target needs to give a good reason for this prediction.

How is inflation measured?

One of the key identifiers of inflation (or alternatively, deflation, where goods and services actually get cheaper) is the Consumer Price Index, or CPI.

The CPI ‘examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. Changes in the CPI are used to assess price changes associated with the cost of living‘.

The very interesting documentary 97% Owned provides some interesting insights into how the CPI is calculated in the UK, where apparently council rates, house prices, and mortgage payments are not included in figuring out the cost of living, even though housing is one of the biggest expenses people have. Yet app purchases and dating service fees are included!

So I thought I’d check into how the CPI is calculated elsewhere. In the US, housing is included, along with food and beverages, apparel, transportation, medical care, recreation, education and communication and other goods and services.

In Australia, although mortgage payments are excluded, council rates and house prices are considered it seems.

Why is it important to understand the CPI?

It seems like every week, tabloid news programs are reporting on how expensive water and electricity bills are becoming, how the price of the average grocery shop is going up, and any number of other scary tales. Weary consumers are filmed at beeping checkouts, complaining about rising costs.

Understanding that inflation is (in our current economic system) a normal occurrence helps us to not only contextualise these ‘news’ reports, but also reminds us that, when our money isn’t making money, we’re actually losing money. The cost of cinnamon buns is very likely to increase over the next 10 years, and if your money isn’t going up too, you’ll be in the sticky (or perhaps, not-so-sticky) predicament of not being able to buy as many buns. This is why considering inflation is crucial in thinking about how long our money will last.

While you’re working, ideally, your wages will keep pace with (or, if you get a promotion or a bonus, even outstrip) increases in the cost of living. But saving for retirement, or some time off work to travel or raise children or other goals, you’re using today’s money to pay for tomorrow’s needs. That’s why it’s so important to have your money working for you.

Does inflation affect us all?

Yes – but not necessarily in the same way, or to the same degree.

Mr. Money Mustache’s ‘Shockingly Simple Math Behind Early Retirement‘ has a built-in a safety margin that takes into account increased spending in line with increases in the CPI. But it’s important to note that this is assuming ‘no further increase in frugality skills’, as Mr. Money Mustache puts it. In other words, if we are smart about how we spend, we may be able to offset some of the effects of inflation through better purchasing, or avoiding certain types of goods and services or substituting others.

For example, whilst cinnamon buns have increased in price, their main ingredients are not significantly more expensive. So by doing more cooking yourself, it’s possible to have your cake and eat it too. While price increases in general are pretty much inevitable, it may be possible to optomise your spending so that you buy more things that remain relatively cheap, and buy fewer of those that increase in price drastically.

I can think of some things which have increased in price over my lifetime – e.g. TicTacs going from 50c a pack to – what is it now? $2.50? A lemonade icy pole going from 50c to $1.80ish?

But I can also think of some things which have not really gone up. A kilo of flour has been around $1 for all of the years I have bought groceries. Milk and bread similarly around $1.

One thread on the Mr. Money Mustache Forums suggests a ‘Mustachian Consumer Price Index‘, which takes into account only those basic items that a ‘Mustachian’ would actually regularly purchase (excluding things like the pricey console games, expensive restaurant meals on a regular basis, and in-app purchases that CPI calculations include).

What would your CPI look like?

33InflationWhat do you consider “basic” items?

Do you think they have increased in price significantly over your lifetime?

Today’s featured image is (obviously!) my delicious 29 KOR ‘shilling’ bun.

Save

Print Friendly, PDF & Email

2 thoughts on “Why does a shilling bun cost more than a shilling?

Leave a Reply

Your email address will not be published. Required fields are marked *