In last week’s column, we looked at the causes of inflation and the likelihood of higher inflation in the future. Today, let’s look at what inflation does—and why it’s a major concern in long-term financial planning.
Why Inflation Is Still a Problem
Even if inflation isn’t making headlines today, its effects are still critical to consider. At its core, inflation means that as the price of everything increases, the value of the dollar in your pocket decreases.
How Inflation Destroys the Dollar Over Time
Here’s an example to illustrate how inflation affects your purchasing power over time. Let’s assume a long-term inflation rate of 8%. Granted, that might sound high by today’s standards—but given federal debt levels, 8% may not seem unrealistic in hindsight 15 years from now. If you feel 8% is too aggressive, substitute a rate you prefer and replicate the math.
Now imagine giving an 18‑year‑old a dollar. By the time they turn 27, it will take two dollars to buy what one dollar once could—meaning that dollar has lost half its value. By age 36, it would take $4; by age 45, $8. At age 54, $16. And by age 63—retirement age—it would take $32 to buy what cost just $1 at age 18. That original dollar has shrunk to just 3.13 cents in value.
This Isn’t Just Hypothetical—It’s Historical
Put in those terms, the long‑term impact of inflation is staggering. But this isn’t just a hypothetical—it’s also a reflection of the past.
A Look Back at Real Inflation
Between 1969 and 1989, inflation ran rampant:
– In 1969, a movie ticket cost 50 ¢; a candy bar was 5 ¢; a scoop of ice cream cost 10 ¢.
– By 1989, movies cost $5.50, candy bars were 45 ¢, and ice cream was $1 a scoop.
Think inflation has been “under control” since then? Ask yourself what those same things cost today.
Modern Inflation: Paper vs. Reality
Some argue that inflation hasn’t been a major problem over the past two decades. And according to official numbers, that might seem true. But let’s look deeper.
What the CPI Says vs. What You Feel
From 1994 to 2014, the U.S. Bureau of Labor Statistics reported that inflation averaged 2.5 % per year. On paper, that doesn’t sound too bad. At that rate, prices would double roughly every 28.8 years—so slowly you’d barely notice from one year to the next.
But did it feel that way?
In my experience, the cost of groceries, utilities, housing, education, medical care, and insurance has risen every year—and by more than a sliver. Sure, a few high‑tech items like computers may have stayed flat or even dropped, but most essentials have climbed considerably.
So why the disconnect between lived experience and the Consumer Price Index (CPI)?
Why the Government Likes a Lower CPI
The CPI is a composite index—it measures price changes based on a basket of goods and services the government chooses, with weights they assign to each item. And here’s the key: the CPI heavily influences the federal budget.
For example:
– Social Security payments are indexed to the CPI.
– Many federal retirement benefits and tax brackets are CPI‑linked.
That means if the CPI rises 3 % instead of 1 %, government spending on those programs increases dramatically. So the government has a clear incentive to keep that number as low as possible.
Plan for Reality, Not Just Statistics
That’s why I recommend trusting your own cost‑of‑living experience more than the official statistics when making long‑term financial plans.
In next week’s column, we’ll explore how inflation impacts your assets—and what that means for your financial future.
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