Inflation: Money's Termite

For those who didn't see it, in yesterday's WSJ, an Op-Ed piece by David Ranson discussed the impact of inflation on a currency's purchasing power.  The article contained an interesting chart showing the purchasing power of money using an inflation rate of 4%.  Without getting into a debate over where inflation is going, we think it is important to note how even small changes in an assumed inflation rate can have a big impact on the future value of your money.  In the chart below, we highlight the purchasing power of $1,000 over a 25-year period using the rate highlighted by Mr. Ranson, as well as three other high profile values.

As shown, using the upper level of the Fed's inflation comfort zone (2%), $1,000 today is worth only $603 in twenty-five years.  This translates to nearly a 40% reduction in value.  You think that's bad?  When we use the current values of the CPI and PPI, the value of money declines substantially faster.  At an inflation rate of 4.3% (the current y/y CPI), our $1,000 loses two thirds of its value over a twenty-five year period.  While that may seem like a big haircut, let's just hope inflation doesn't rise to the current level of the PPI, which most recently stood at 7.4%.  If that rate were to become the norm, our "cool grand" today would be a much less cool $146 in 25 years.

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Comments

[San Fran Sam]

I always have a bit of a problem getting my head around declining purchasing power as shown in the article. i like to think of it the other way.

At 4% per inflation, something that cost $100 today will cost $148 in 10 years and $219 in 20 years.

Another way to look at it, in the movie I, Robot, Wil Smith paid $46 for two Budweisers.