Inflation may only be 3%, but that hardly explains the 35% increase in food prices, or the 100% increase in oil prices in the last year. You can't chalk it all up to supply and demand.
I know this sucks, most of the increase in food is due to gas prices. The average distance food travels to your fork is something like 1500 miles. This is another large reason to get off of oil as a country. I am a really big fan of farming co-ops because of this, there is a good book (even if it is fluffy in areas) called deep economy by Bill McKibben. Actually just look into co-ops, the book is kind of a waste of time now that I think more about what some of the things he was saying.
Edit: Adding video
Just found this and it is very pertinent to this and explains the food and oil jumps and overall inflation well.
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So I am putting some time into this problem, because I understand the huge issue retirement is, I am actually helping out my dad who just retired to figure out how much he has to live on so that he doesn't go too crazy. And figure the more often I do these kinds of things the better at it I will get. So here it goes.
Figure 1 – Nominal Interest Rates, Real Interest Rates, and Inflation Rates, 1959–2008
Note :  The nominal interest rate shown here is the rate on US government five-year bonds. The inflation rate represents annual growth in the consumer price index. The real interest rate is the difference between the nominal rate and the inflation rate.
Source : Graph prepared by the author, using data obtained from the
Federal Reserve Bank of St. Louis.
With the five year bonds usually a decent amount above inflation rates (Except for recessions where they have such a high demand that they drop slightly below but that is short term and the amount above during the normal times more than makes up for it), we won't need to worry about inflation after you retire in 25 years because the yields on the majority of the unused portion of your money will at least keep up with inflation for the long term. But we need to find it for before you retire.
The rule of thumb is that you need about 75% of what you earn while working for retirement, I bumped it up to 80%. We can do 100% too if you want, but most retirees don't have the same costs (gas, clothes, mortgages, family costs, ect is all less when you get older is why I stuck with 80%).
So if we figure $50,000 for 30 years of retirement = $1,500,000 needed to spent in retirement (in today's dollars). Shame it is not this easy eh.
So with retirement in 25 years (I am going to assume nothing is saved yet, but it would greatly change things if you do have savings), the future value of $50k is $92,697 (basically the amount of goods today $50k will buy is approx $92697 in 2035, at 2.5% inflation). If you look at the second chart on amount used it shows how much is the actual amount with compounded inflation.
So back to excel...
OK so after messing around with this for the last 3 hours, I think that I have it all worked out. I got you to 95 (assuming you are 40 now). This is all hypothetical of course, and I am not trying to control anyone, but just love numbers and wanted the challenge of figuring this out.
So assuming you have zero savings at age of 40, and wish to spend 80% of your income of $50,000 today (using the old lady example, I can change numbers easily if you want now that I have the excel file done). I used a steady inflation rate of 2.5% a year when figuring amount you earn and the amount used in retirement.
If you save 25% of your income with a average of 10% interest gained (high number, but at 40 there are about 15 years of savings missing so it has to be) for 15 years, and 30% for the last 10 years, you should have enough to easily get you to 95 years living pretty much the same lifestyle you are now (or the lady at 50k a year is anyway).
For the savings I have the bulk (80%) invested in high quality bonds that are about 2.5% above inflation rate, and 20% in a savings account which is about .oo5 above inflation. I did not add in inflation to those numbers because I figured it into the amount of money you need to spend being where the inflation actually is.
I don't think treasuries are really all that liquid, first of all you have to hold them for a certain amount of time before they mature. Then there is that pesky chore of taking it down to the bank and selling it.
http://www.sifma.net/story.asp?id=1209
There are about 500 billion traded in us treasuries a day (may be slightly different, but still shows the size of this market). You don't need to wait for them to mature, because banks and companies use these and commercial paper as assets instead of cash. If you use a internet broker you can trade them in moments just like a regular stock.
But also if you are using them for retirement the 5 years bonds work great because you can keep them in a safe deposit box and know they are there and will mature for you instead of just trading on the market dealing with fluctuations of daily trading. And the interest rates are great with the different maturities, because they average out the future trend among the dates, so that way you are not losing out if you buy a short term bond vs long term where they give a slight bit more to entice the larger buyers.
Hypothetically if you were dropped into the middle of the rain forest you would have a hell of a time buying anything with a US 3 year Bond, believe me. I would probably rather have gold or silver if I were to be dropped into some remote locale, its universally accepted everywhere you go and the exchange rates are updated every minute.
You are of course right with this, it definintly is not considered a currency, but it is the most liquid of all non currency assets. It is considered M2 while currency is M1, but assets like stocks are considered less liquid than treasuries though.
I kind of agree that all the banks should just blow up. We would be better off in the long run.
There is something to be said about this. Because if we could wipe out all records and start from scratch it would be wonderful. I would say that we would need the banks to still be there for the future, but one big wipe of memory would be fantastic.
I think that it was Benjamin Franklin who tried to get into the constitution that when we die we are not allowed to pass on our assets to our families. That way everyone who starts out has to make their own way, wealthy families would of course still have a huge advantage, but it would almost negate the need for taxes, because when people die, their goods go to the government and essentially be a lifetime tax when you would not miss it.
I am not sure how well it would work, but it is pretty interesting.
