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The Real Story of Inflation

| June 30, 2021

By Kristi De Rycke, Registered Assistant

Inflation is a big word that is often thrown around in the media.  What does it mean? Per Investopedia, “It is a quantitative measure (blah, blah, blah) of the rate at which the average price level of a basket of selected goods and services in an economy (wha, wha, wha) increases over a period of time. It is the constant rise in the general level of prices where a unit of currency buys less than it did in prior periods.” Well that clears it up!?! I think if we look at it another way, it becomes crystal clear quickly. 

Let’s take a look at what things cost 50 years ago in the 1970s. 50 years ago seems like forever. However, you start saving in your 20s and 30 for when you are 70 or 80+. Let’s assume a current 75-year-old enjoying retirement started saving in their 20s. How far did a dollar spread then? What did things cost then?

Cost of Things Then & Now:

Item1970s Price2020 Price
One Dozen Eggs$0.59$1.42
Gallon of Milk$0.62$3.45
Loaf of Sliced Bread$0.25$1.99 - $3.99
Gallon of Gas$0.36$2.29
Movie Ticket$1.55$9.26
One-Year Tuition at a Public University$1,207$9,970
Median Home Price$23,600$244,054
Price of New Car$3,900$37,000
Recliner Chair$70$299 - $4,000
Private Room in Nursing Home (Annually)$8,645$100,000

The first thought that you might have is that people make more now than they did 50 years ago. That is true. The median household income was $9,870 in 1970. (15). According to the U.S. Census the median household income in 2018 was $61, 937. (1) Does the cost living always increase equal to pay?  Not always. For every dollar that wages went up since 1970, the price of an average item has gone up $1.36. (8).  

Inflation is part of the economic cycle when there are rising prices of goods and services. As prices rise, the purchasing price of each dollar decreases. The inflation rate varies every year. The average annual inflation rate between 1913 and 2015 was 3.22. (16) 

What does it mean for your savings? If you take say $500 and stuff it under your mattress, do not expect it to buy as much in 20 or 50 years as it does today. If you put your money in a bank savings account that pays out .25% and inflation is 3.25% that year, you will hypothetically lose 3% of the money value related to inflation. If you put it in a CD with a rate of 2%, and inflation is 3.25% you will only lose 1.25% but you have not paid taxes on that income either. You will either need to save more money to buy the same item or invest it to get some growth on your money to keep up with inflation. 

By Greg Johnson

What a great bit of information and one that people often have a hard time understanding. In fact, most people think putting their money in a bank account keeps their money safe and they think they can never lose it. They are right that they wont lose the money they have, but they may lose the purchasing power that money has. As seen in the examples above a dollar today is not a dollar tomorrow as costs of goods continue to increase. From bread to new cars it doesn’t matter, everything increases in prices. Letting your money go to work for you by investing can help offset that decline in purchasing power.

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