You hear inflation this and inflation that. All the time. I get it, I understand, but it would be nicer and more honest to explain value of money in inflation on examples that are easy to imagine.
Inflation is when prices for the same item or service increase over a period of time. Or it is known as the loss of purchasing power. The value of currency is also going down.
Example
If someone bought something in the year of 1968, random number, and paid $10, how much would that person pay for the same item in 2024? While everything would remain the same except the price would change due to inflation.
In 2024 he would have to pay $90.66 for the same item or service. Accumulated inflation since 1968 is 806.6% … so good luck.
Example 2
But 1968 is too far back, so how about if someone bought something in the year of 1990, again randomly chosen year, and paid $10, how much would that person pay for the same item in 2024? While everything would remain the same except the price would change due to inflation.
In 2024 he would have to pay $24.14 for the same item or service. Accumulated inflation since 1990 is 141.4% … good luck again.
I think examples like this are more clear than when we hear on TV that inflation is now 8%. Numbers are good and fair, but nobody understands what they mean in life.
Example 3
One more nice example of how numbers work but confuse. Say it’s been 5 years since you saved $100 and put it away. And the annual inflation in each of those 5 years was 6%, 8%, 10%, 4% and 6%. So those $100 should still be kind of close to $100 in value, right? Not really. Those $100 would be valued almost 30% less after 5 years. Check out this table:
| Year | Inflation in % | Money |
| 0 | $100.00 | |
| 1 | 6% | $94.00 |
| 2 | 8% | $86.48 |
| 3 | 10% | $77.83 |
| 4 | 4% | $74.72 |
| 5 | 6% | $70.24 |
Sad numbers, this is how sad inflation is. If you took the same $100 and went through 5 years but only with 2% inflation, you would do much better. And value of your saving would not be only $70 but $90. Lower inflation is good for us!
| Year | Inflation in % | Money |
| 0 | $100.00 | |
| 1 | 2 | $98.00 |
| 2 | 2 | $96.04 |
| 3 | 2 | $94.12 |
| 4 | 2 | $92.24 |
| 5 | 2 | $90.39 |
Official USA inflation rate in the past 5 years was
1.4%, 7%, 6.5%, 3.4%, 2.7%. So those $100 bucks you put aside 5 years ago is now worth about $80 in value of 2020.
| Year | Inflation in % | Money |
| 0 | $100.00 | |
| 1 | 1.4 | $98.60 |
| 2 | 7 | $91.70 |
| 3 | 6.5 | $85.74 |
| 4 | 3.4 | $82.82 |
| 5 | 2.7 | $80.59 |
Leave a Reply