# What Should I Assume For Inflation Rate?



## OnlyMyOpinion (Sep 1, 2013)

I couldn't find another recent, relevant thread so I've started this thread because the subject of inflation assumptions was raised by TomB16 here: http://canadianmoneyforum.com/showthread.php/118265-Living-off-of-50k-100k-in-Canadian-dividends-for-early-retirement/page20

Tom raised a very good point and I have seen it mentioned on the CMF in the past - that recent annual CPI increases of around 2% seem low to what most of us feel we experience as our cost of living.

We probably all experience slightly different inflationary costs depending where we live, what we consume, and the stage of life we are in.

*What inflation number do you use in your saving and/or retirement projections? 
Where do you get this number from?
Have you saved more, invested differently, or do you plan to live more frugally to account for future inflation?*

For reference, the Consumer Price Index (CPI) tables by subject, including historical annual values are here: http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/ind01/l3_3956_2178-eng.htm?hili_cpis01


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## nathan79 (Feb 21, 2011)

The biggest expense is housing. The average annual inflation for real estate where I live is 9% over the last 15 years -- higher than that in the last 5 years.

Of course you can ignore that if you already own a house. And if you rent it seems like rents go up half as fast as actual prices.


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## OnlyMyOpinion (Sep 1, 2013)

Yes, while most homes were never bought with that in mind, they are providing a boost to the nest egg of many people retiring these days and downsizing or renting. 
I know my parents would have been SOL without the funds they were able to get selling their home a few years ago.

I think we tend to forget though that the increase in home values can be quite uneven in place and time. I just sold 2 properties in vastly different markets that we had held for about the same time (~7 years). One sold for pretty much the same price paid (after fees) - so a loss in real dollar terms, while the other sold for more than twice the price paid (after fees).

Our own solution has been to have the good fortune to save a large nest egg. I can use a 1% or 2% real rate of return in my forecasts, inflate annual spending and still not run out in 35 years. Since we are at the 'decumulation' stage, the uncertainty of saving assumptions during accumulation is out of the way (i.e. we're older and closer to dying :upset: ). Our house is an additional asset that is not factored in.


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## nathan79 (Feb 21, 2011)

True; I'm just wondering how a young person today can prepare for such inflation, since no investment will reliably return anywhere near 9%. About the only thing you can do is save as much as possible, make a 6-figure income, or preferably both.

Of course, you're right that it depends on where you live. I suspect that the generation after the Millennials (Generation Z?) will be leaving Toronto and Metro Vancouver en masse. Or they will be living in vans like some Millennials are already doing... https://www.vice.com/en_ca/article/9b8mmd/surreal-estate-part-three

I think one of the problems with Vancouver is that we don't have incomes to support such prices. Average income here is one of the lowest among major cities.


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## Eder (Feb 16, 2011)

I assume about 2% inflation these days...seems about what most financial planners use & I no longer own any real estate to skew that figure. I won't be buying again unless we get a drop of at least 50% and will be happy to average 4%/year after inflation adjustments...much lower rate than my 1st 8 years of retirement.


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## TomB16 (Jun 8, 2014)

nathan79 said:


> True; I'm just wondering how a young person today can prepare for such inflation, since no investment will reliably return anywhere near 9%.


I recommend further reading.


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## nathan79 (Feb 21, 2011)

TomB16 said:


> I recommend further reading.


I'm 38 so I was more talking about the younger generations, even though I can't afford a house either. (Well, I *could*, but barely).


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## Eder (Feb 16, 2011)

Well you can put your $ into RY...its CAGR since 1995 to present is 16%....10k becomes $249k. No reason they wont continue at at least 10% CAGR. Better than buying a house.If the volatility is too much try Telus...CAGR of 10% over 23 years or BCE at 15% same time frame.

Line up to tell me growth for equities are over starts here......................>


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## Joebaba (Jan 31, 2017)

So quoting TomB16 from the referenced thread….

“Groceries, house, rent, electricity has quadrupled, water, natural gas, groceries, bank fees, any fees, are through the roof. ... and yet, we have had inflation of 2~3% for the last decade? That's silly.”

I live in Saskatchewan, and I had a look at my personal bills from the past 10 years where practical….

Groceries – this is very hard to evaluate, because my week to week, year to year bills have varyed more by my eating habits, than by inflation.

Housing – price of an average house rose 11.4% per year from 2006 to 2016, but only 3.2% from 2010 to 2016 (big boom in prices here in the 2004-2008 timeframe)

Rent – 7% per year

Electricity – 4% per year

Natural gas – has gone down considerably – from $0.2683 per cubic metre, to $.1387 per cubic metre

Bank fees – My waived fees were $14.95 in June 2012 (oldest statement I can find) and are currently $15.95 per month - so that's 1% per year

To add a few other items

New cars have gone down as per this site
http://wgntv.com/2016/04/25/the-ave...49-how-much-was-a-car-the-year-you-were-born/

Bus Pass
$2.10 to $3.25 – 5% per year

Gas
$1.04 to $1.09 – 4 tenths of a percent per year


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## RBull (Jan 20, 2013)

Good post OMO. My answers below along with a few comments. FYI we are retired 3 and 6 years ago, late 50's.



> What inflation number do you use in your saving and/or retirement projections?


 *2.5%*



> Where do you get this number from?


 By looking at historical data that follows, and considering the more recent trending of inflation/interest rates being relatively more moderate as well as looking at our own experience. 2.48% is the CPI annual average for the past 35 years and is approximately the remaining time frame I have planned retirement for- hence my 2.5%. Our own actual experience for the past 4-6 or so years I have reliable info for is in the range of CPI numbers.* YMMV. CPI has averaged 3.05% over the past 103 years in Canada, since 1970 4.02%, since 1980 2.97%, since 1990 1.9%, since 2000 1.83%, since 2010 1.57%. The trend is evident but no guaranatee of course. http://www.bankofcanada.ca/rates/related/inflation-calculator/ 
*some *total % increase* numbers
-groceries totals past 4 yrs + 17.5%
-electricity rates past 6 years +25.2%
-my home gross % price increases
#1 9.1% over 4 yrs
#2 28.6% over 13 years
#3 48.2% over 9 years
#4 (current) 10-15% ESTIMATE over 6 years
-rent 5% over 5 years (compared exact same apartment we rented 6 years ago while renovating here)
-bank fees (-33% vs. 10 yrs ago) chickenfeed anyhow



> Have you saved more, invested differently, or do you plan to live more frugally to account for future inflation?


 Our savings and spending cash flow plans prepare us for 2.5% inflation (1 unindexed work pension, govt pensions, investments @ 1% real return, inflation @2.5%) If inflation runs higher we have a good percentage of discretionary spending and a frugal nature that we can rely on to help stay on track, or downsize our home. If investments do perform better we may have a buffer or something to make up losses to potential outsized inflation. What concerns me most is growing governments with unfettered spending and rising taxes, which doesn't seem to concern many people (many looking for more from govt) - future impact on fed/prov income tax rates, property taxes, health care costs etc.


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## steve41 (Apr 18, 2009)

Sort of on topic..... When projecting expenses, etc, over time, be aware that the consumer price index is a linear, not an exponential curve.


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## ian (Jun 18, 2016)

We assume that as retirees our inflation rate will be higher than average simply because our basket of goods, as retirees, is not reflective of the national average basket of goods so to speak. I increase the current rate by fifty percent to reach what I consider to be a reasonable number. This is even higher when our currency is low and one typically spends a fair amount of time outside the county.

We judge performance of our investments from two perspectives. How well we have done compared to the market in general and how well we have done relative to inflation. Both have been excellent over the past five years. We have benefited from sequence of returns and low inflation. This has made a very positive impact on our net worth. We are however very aware that this could change. As long as inflation is low and our investments are doing at least two points above inflation (lately significantly higher) we are happy. If this were to occur it would certainly cause me to take another look at our financial plan.

I think the second big item regarding retirment and inflation depends on where one resides. Housing costs/rents in some areas have increased significantly in the past five years. Big impact for some who rent. Where we live rents have actually decreased-negative inflation for this component of COL. Plus of course whether you are carrying a mortgage or debt into retirement that is subject to interest rate increases.


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## milhouse (Nov 16, 2016)

I use 2.5% inflation in my retirement calculations / projections and adjust the running tally based actual numbers. I chose it as a somewhat conservatively higher point in the BoC's target 1-3% range. 
That said, for the most part, right now it really doesn't affect my savings, spending, and decision making. I mainly analyze what our spend is during the year and try to make adjustments if one category or bill seems to be growing faster than I'd like. However, I kind of use my inflation target to give a very rough estimate growth of future spend, estimate what the OAS cutoff will likely start at when I hit age 65, and what kind of benefits to expect from OAS and CPP. 

One of the things I'm hoping to do to get a better gauge of price inflation is to track my own basket of goods on an annual basis that I know I buy on a regular basis. 

Note: Inflation numbers before 1991 are kind of not practical for calculations because the BoC introduced its inflation control target policy then.


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## like_to_retire (Oct 9, 2016)

milhouse said:


> One of the things I'm hoping to do to get a better gauge of price inflation is to track my own basket of goods on an annual basis that I know I buy on a regular basis.


Interesting idea. It seems like it would be a fairly big job though. A lot of stuff I consume does appear to increase more than the CPI they report, but it's just a gut feeling. 

I've looked at the CPI basket before, and it certainly is broken down to a lot of detail.

ltr


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## Beaver101 (Nov 14, 2011)

For me - realistically whatever Stats Canada says the inflated inflation rate is, 1% - 2% is what I'm going to get for my retirement growth. And realistically with the costs of goods (food, consumer staples, etc). and services (housing, taxes, utilities, water, etc or what RBull has posted above #10), going anywhere from 10% to 30% means my retirement growth can never keep up. This means either to keep up, I either work til I drop, take another gig or two, or take a gamble on the stock market.


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## milhouse (Nov 16, 2016)

like_to_retire said:


> Interesting idea. It seems like it would be a fairly big job though. A lot of stuff I consume does appear to increase more than the CPI they report, but it's just a gut feeling.
> 
> I've looked at the CPI basket before, and it certainly is broken down to a lot of detail.
> 
> ltr


Yeah, that's why I haven't fully jumped into it yet. Trying to figure out an easy way of doing it. Statscan data is a good default but my reasoning is that I'll get a more accurate representation of my spend growth based on what we actually buy. 

In my monthly spend, I track individual bills (like property tax) and category groups (like groceries). The individual bills kind of speak for themselves in terms of growth but some of them are usage based which makes it harder to estimate; just trend. 
For category groups, I'm looking to just pick a few specific items that we buy regularly to be representative of the growth in that category and just note the cost on an annual or semi-annual basis. 6 pack of romaine lettuce from Costco, Westjet flight to Vegas on a specific date, etc. 

Anyways, it's still a work in progress. Not sure how well it'll work.


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## TomB16 (Jun 8, 2014)

Folks, if you wish to invest successfully, objectivity is key. Forget your gut; it's subjective.

In 2007, we had a vacant house. Water cost us $26.75 every two months. Today, water in a vacant house costs $61 per month. Those are the billing costs. Volume cost has over doubled, also.

We have a couple of houses we've owned since 2007. One of them cost is $170 for fire insurance in 2007. Today, it's $730 and we have increased our deductible to $5000. We've never filed a claim.

Food is tougher to nail down. We have a decent idea of what our food bills were in 2007 but I suspect we are eating better these days.

No doubt, gas is the exception.


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## OnlyMyOpinion (Sep 1, 2013)

Tom, from what I gather, you'd suggest an inflation assumption of ~7%, and feel we need at least a 9% nominal return to save sufficiently, and would accomplish this with leveraged RE investments?
- Not sure if that is a fair summary. 

A portion of our savings have come from (unleveraged) RE but it has only ever been a small slice of the portfolio.


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## TomB16 (Jun 8, 2014)

Right now, I believe inflation is closer to 6%.

Consider this:

If you could earn 6% on investments, and you could save 50% of your take home salary, it would take 30 years of work to have 30 years of retirement with the same level of spend as when you were working. The interest would nullify inflation but inflation could easily go up or down from where it is. This simple idea assumes inflation is constant.

If you can earn 6% and you can save 25% of your take home salary, it would take 40 years of work to have 10 years of retirement with the same level of spend.

I'm not trying to talk down to the forum. It's a massively basic idea but not intended to be insulting.

So, I have sliced and diced this every which way. There are all sort of metrics I track, including the government metrics they use to determine inflation. Those numbers are all published.

I long suspected the numbers but I knew for a fact they were baloney a couple of years ago when I checked out their numbers for various metrics and with 130+ data points, only two were below 7%. One was gas at something like -3%. I don't recall the other but it was 4.7% increase. Every other indicator was over 7%. They added all up, divided by a number, carried the two, subtracted their shoe size and, wala! 2.3%! Magic!

If inflation is reasonably high and earnings are lower, like almost any pension plan, it becomes an inefficient process to save for retirement. You could easily have to save 3~5 dollars for every dollar of retirement money. Do the math. Really. Do it. The longer you have to retirement, the worse the numbers look. That means, you have to work for 6~10 days to have 1 day of retirement money, assuming you can save 50% of your take-home. Saving for a retirement that is 40 years out becomes a bad idea. You're better off to live hand to mouth and then binge save at the last possible moment for maximum efficiency.

That brings me to real estate. I should stop talking about it. I don't recommend it, specifically. I feel most people shouldn't do it. If you have trades and a property manager, you will lose money. It only pays if you can do almost all of the work yourself. If you can, you can make a lot of money.

The reason I got back into real estate heavily about 15 years ago is I realized I need to beat inflation. R-E can do that by a large factor. R-E is a pain in the ***. I literally just got home from a house that "had a bad smell" in the basement. I poured some water down an unused wash sink to fill the P-trap and spent some time with the renter, explaining why that will work and being nice to her. Few people would want to spend their evenings that way.

People in my family are upset that I don't waste money. Really. They think I should be lighting stacks of money on fire. After all, they would, if they had some. Yeah.... lol! They are morons and ignorant to how difficult it is to save money and how much more difficult it is to transmit that money into the future efficiently. They don't care. They would just buy fancy cars, quit their jobs, and go back to being broke in about 10 minutes. 

It was a matter of determining that, at the returns we get out of R-E and the markets, I can put $1 in and get a multiple of equivalent buying power out, a few years from now. In exchange for the nice return, I work like a dog. Few would tolerate my life, as best I can tell.

If I was earning 3% returns, we would probably have less than a million bucks saved and I would be dreaming of retiring one day a long time from now. Some years ago, I decided to take on the ridiculous work load and retire early. I could have gone a few years ago but didn't hear the oppressive thunderclap of mortality until my father passed a few months ago. 

Would I do it again? Yes.

Would I work this hard if I couldn't make returns that beat inflation? No. I'd save a small amount and leave the heavy retirement lifting for the last decade, or so.

I think it's about understanding the dynamics and making choices. I've explained mine.


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## like_to_retire (Oct 9, 2016)

Beaver101 said:


> For me - realistically whatever Stats Canada says the inflated inflation rate is, 1% - 2% is what I'm going to get for my retirement growth. And realistically with the costs of goods (food, consumer staples, etc). and services (housing, taxes, utilities, water, etc or what RBull has posted above #10), going anywhere from 10% to 30% means my retirement growth can never keep up. .....


One of the things I think we overlook sometimes is that inflation 'enjoys' the magic of compounding just like investing. So we see 2% a year claimed by Stats Canada, but that compounds year after year and becomes a lot more eventually - it's exponential. 

ltr


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## steve41 (Apr 18, 2009)

No its not. If you plot the CPI over many years, it is a straight line.


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## like_to_retire (Oct 9, 2016)

steve41 said:


> No its not. If you plot the CPI over many years, it is a straight line.


No, inflation would have to go down each year for it to produce a straight line. When rates are relatively low, the function will appear linear on a graph, but it's not.

ltr


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## steve41 (Apr 18, 2009)

Inflation is defined as the slope of the cpi curve. It is not an exponential curve.


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## like_to_retire (Oct 9, 2016)

steve41 said:


> ....If you plot the CPI over many years, it is a straight line.


Yearly CPI values over time are not a straight line. The value of goods compounds each year using that years CPI value. It's the same with compounding investments.

Example: A CPI of 10% per year for 20 years is not 200% (10% x 20) at the end of the 20 years. It will be more than double that since it's exponential. The formula being a simple Pn = P(1+i)^n.

Below is an example graph and table I made up quickly that shows the graph of CPI at 10% for 20 years. If the price of an article was $100 to start, after 20 years with a 10% inflation each year, the final cost will be $672. It wouldn't cost $200. That would be linear. The $672 is exponential.

Does the graph look linear?


View attachment 16202






Pick any article on the internet on this subject on the second page.

Take a look at this PDF and see the math matches exactly as I laid it out in my example.

In part:
_*Calculating Total Cost & Inflation Factor for Estimates *

Inflation is not always as simple as saying there’s 3% inflation every year. To be correct, that inflation must be compounded in order to reflect new inflation prices from each previous value calculated instead of just using what 3% reflects for the base year you are calculating. This will be shown in detail below. 
For example, 
3% inflation rate factored into $100,000 gives you $103,000 (100,000 + (100,000 *0.03)) for the next year, which is accurate in both the simplified and compounding equations. 
But, what if you use 3% inflation over the next 5 years? 

Using simple inflation techniques, the new value is (100,000 + (100,000 * 0.03 * 5 years)), which equals $115,000. 

But, when compounding the inflation factor you get a value of $115,927, which is 
a difference of $927 from using simple inflation rates. Why the difference? Well, instead of just adding $3,000 for every year of inflation, we take the previous 
value that was calculated ($103,000) and multiply by 3%. Then take that new value ($106,090) and multiply by 3% again. This is the longhand version and you continue this process up to however many years you are calculating, in our example, 5 times. The simple way to do this is shown in the equation below. 
Pn = P(1+i)^n 
Where: 
Pn = Total Inflated Estimated Cost 
P = Base estimated Cost 
i = Inflation Rate 
n = Difference between Base Year and Selected Year. Ex 2010 - 2005 = 5 years, therefore n = 5(1+i)n = Inflation Factor 
Example: The current (2005) estimated cost of a project is $100,000. Calculate the expected cost of the project in 2010. Assume a 3% inflation rate. 
Base Year: 2005 
Future Year: 2010 
Initial Cost (P): $100,000 
Inflation Rate (i): 3% 
Pn = $100,000(1+0.03)^5 = $115,927_ 

ltr


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## steve41 (Apr 18, 2009)

Here is the graph of the CPI from way back.... Examine the curve from about 1970 to current. Looks straight to me.

http://fimetrics.com/cpi-history.pdf


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## like_to_retire (Oct 9, 2016)

steve41 said:


> Here is the graph of the CPI from way back.... Examine the curve from about 1970 to current. Looks straight to me.
> 
> http://fimetrics.com/cpi-history.pdf


Oh-vey Steve. Of course it looks straight. Inflation has dropped continuously since the early 1970's (when it was around 12%), so it graphs that way.

Did you actually read my post?

ltr


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## Beaver101 (Nov 14, 2011)

I think both graphs look the same ... it just keeps going up over time. Better than "oh, inflation is just running at 1%-2%" ... in 2017, duh.


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## olivaw (Nov 21, 2010)

My wife and I have not increased our monthly budget for four years and our spending appears to be consistent with the published inflation figures for Alberta. I just don't see where people are getting 7 - 8 - 9% from.

http://www.calgary.ca/CA/fs/Documen...Inflation-Review/Inflation-Review-2017-07.pdf (PDF)


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## steve41 (Apr 18, 2009)

Okay, look at it this way..... put $100 in your bank's savings account. Come back a year later and you will see it has grown to a greater or lesser degree. 

Now, put 10 ounces of gold in your safety deposit box and come back a year later..... it may have grown or shrunk in value.


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## ian (Jun 18, 2016)

We kept our budget (in Calgary) constant for four years as well.

But in our retirement planning we did budget for inflation since we can remember the impact of inflation many years ago. We have been fortunate over the past five years. Inflation has been lower than we budgeted for, investment returns much higher making for a big boost in our current and future retirement equity because of sequence of returns.

We still continue to bake in conservative inflation number to our financial plan just in case. We no longer rent but for Calgarians who do rent the impact of rent decreases probably resulted in negative inflation. Our rent, prior to buying recently, went down by 17 percent.


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## GreatLaker (Mar 23, 2014)

One thought I had is that inflationary things like property taxes, energy costs, water, electricity, natural gas are going up at a rate higher than CPI. These items are easy to track because they are often regulated and have a relatively consistent monthly or annual spend. 

On the other hand, items that have low inflation or sometimes even dropping in cost, like consumer goods, clothing, electronics, travel, food, are harder to evaluate because their spending is much more variable and discretionary.

So looking at it subjectively we feel the pain of predictable cost increases much more than the benefit of costs dropping on certain discretionary items. Hence subjectively we may feel that inflation is really higher than it is. A couple of posts upthread (#28, #30) corroborate this, as posters that have carefully tracked their spending have not seen the budgetary increases that subjectively we feel when paying taxes and energy bills.


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## james4beach (Nov 15, 2012)

GreatLaker said:


> So looking at it subjectively we feel the pain of predictable cost increases much more than the benefit of costs dropping on certain discretionary items. Hence subjectively we may feel that inflation is really higher than it is. A couple of posts upthread (#28, #30) corroborate this, as posters that have carefully tracked their spending have not seen the budgetary increases that subjectively we feel when paying taxes and energy bills.


Looking at my spending logs, focusing on the absolute essential categories (rent, utilities, services, food), I am seeing *4.0%* annual rate of increase.

Currently my total annual spending is flat over the couple years (0% rate of growth) but with the 'essentials' rising at 4.0%, it seems I have taken the money out of other discretionary categories, or I've gotten more efficient.

(This is in the US with 2% inflation rate). So yes, I'd say it looks like true inflation runs higher than the CPI.


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