Temporal Arbitrage: Buying Low, Buying Lower

If you could go back in time, what would you trade with your parents?

Although we like to boil down inflation to a single figure, cost of living is not as simple as CPI. Prices of different goods and services change at different rates. Something that may have been cheap in the past may be more expensive now. Conversely, expensive items may become cheaper. Add monetary inflation - the overall weakening of currency's purchasing power - into the mix and it gets confusing.

Ultimately, we are not all affected the same way by price changes because we don't all buy the same things. What if we could use the differences in price changes to inform our purchasing, increase our savings, and thereby our wealth? I term this 'maximising cheap, minimising costly' expenditure strategy - spurred by my first question - 'Temporal Arbitrage'.



Unfortunately for me, the title may be my only original contribution. The Economist in 2000 ran an entertaining and comprehensive article titled 'Inflation since 1900: The Price of Age' on this very topic. Read it now and if you still want more, read on.

That was then, This is now

Anecdotes of the strong compounding of price trends abound. My mother recalls that in 1982 a house in Adelaide Australia ($32,000) was a third more than most salaries ($24,000). By 2005 it would be seven times. However, our second hand Holden Kingswood was 8,000 in 1984 dollars, while my used Mercedes was $4,800 in 2007.

It does not take long for prices to diverge. The Economist's time span is a century, but the phenomenon is visible after seven years. Source: ABS Australian cost of living indexes 2007 to 2014, Catalogue: 6467.0.

What are we going to do about The Other Generation?

This highlights to me the dangers of following the aspirations of our predecessors. Not only because things they held dear may be too costly now, but also because it could blind us to the opportunity for bargains in the present. As examples, home ownership may be too expensive (making property development riskier), but the costs to buy into local and global share markets is falling with the overall cost of financial services.

Be very wary of using this data to inform vocational choices. Construction, teaching, and health work may prima facie look like slam-dunk paths to riches but prices may increase for reasons other than labour costs.

Rather, controlling expenditure will increase your savings regardless of your employment status. Adjusting your spending power to beat inflation could be as simple as socialising in museums or online, rather than over shots and smokes.

Finally, to answer my own question, I would trade my parents' house for my laptop and a marriage manual. ;_;