Inflation's Power: The Dollar in 25 Years

For those who didn't see it in Wednesday'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.

click to enlarge

Comments

[Balsamo:]

Quite scary considering you could need 6.840.000$ to get the bying power of each million you have today.

That is the reason why inflation should be the number one enemy even if that mean going through some recessions from time to time.

Feel free to send a copy of this article to uncle Ben

thanks for your work

2008 Feb 29 09:16 AM

[erniem:]

I keep a small portfolio of German stamps from the twenties to remind me of this. I have a set that were franked (restamped) at 10x, 100x, 10,000x . 400,000x and 1,000,000x. The last one is a one mark stamp that was now franked 1,000,000 marks. Now THAT is inflation.

2008 Feb 29 09:21 AM

[ari5000:]

fortunately the American people are never taught finance in high school so they can remain blissfully unaware, diploma in hand, as their government destroys any chance of a comfortable retirement.

2008 Feb 29 09:23 AM

[Rajiv Sethia:]

This problem is universal, not just in the US, causing an unnecessary and undesirable redistribution of wealth in society. When people lose faith in money as a store of value, they will run to commodities, gold and other such stuff. Inflation should stay really low.

2008 Feb 29 10:48 AM

[Dr. C.:]

The real inflation rate (not the published government version) is closer to 12%. See www.shadowstats.com/al... . This rate takes that future buying power down to about $40 in today's $'s.

2008 Feb 29 11:08 AM

[Dr. C.:]

The real inflation rate (not the published government version) is closer to 12%. See shadowstats.com/altern... . This rate takes that future buying power down to about $40 in today's $'s.

(sorry about this double post - somehow I posted under someone else's name above)

2008 Feb 29 11:10 AM

[Neil Cohen:]

do not over-react people.....we have to knowledge and tools of the fed to limit the destruction of recessions - the downward economic pressure of slower gdp growth, and the busted housing market will keep inflation in check over time. The price of oil is not all we should be concerned with - esp when inflation adj. most commodities have been cheap for years. If global growth continues at breakneck speed prices of goods will increase globally and relatively the dollar will be ok - its a 9 inning game.....inflation will be tamed once we save the economy from Greenspans inability to raise rates.

2008 Feb 29 11:21 AM

[talktowen:]

The real inflation rate is really high like Dr.C stated. Look at M3 growth at Shadowstats or nowandfutures.com/key_... In the long term, inflation will not be tamed. US has a current liabilities of $53 trillion for social security and medicare discounted in present value based on the US Controller. Therefore, the US has no choice but to inflate. Look at video below from US Controller, our top Accountant/auditor for the US government.

www.youtube.com/watch?...

2008 Feb 29 01:19 PM

[Pent up demand:]

Agreed that the Fed and Feds have no option but inflation due to the entitlement trap. Oh, the irony that programs ostensibly founded to prevent seniors from living on dog food in their old age are likely going to put a lot of people in just that position.

2008 Feb 29 01:46 PM

[User 151956:]

please. you act as if inflation is new. the whole point is to invest in assets whose returns account for inflation on a risk adjusted basis. absolutely amazing. here's food for thought - does it matter if inflation averages 4% for the next 10 years if you're investing in sectors (energy, commodities etc) that will hedge that increase? two words for you: inter national. or you could just short the USD for the next year or two and then buy TIPS.

2008 Feb 29 01:46 PM

[User 142738:]

You could replace "dollar" with any word and your statement would be valid. How about the decline of the rand, the pound sterling, the yen, or any other currency? Are you suggesting they have no inflation?

You're just combining a well-known fact with a current event to make a sensationalized article. Either that, or there's an online elementary macroeconomic class missing a student.

2008 Feb 29 02:00 PM

[whidbey:]

What we are obviously missing is the fact our government is keeping up with inflation by providing us more money for the same level of effort. It does not get much better, or thoughtful.

2008 Feb 29 02:39 PM

[Pent up demand:]

I'm glad that others can be so sanguine about inflation. That doesn't change the fact that it is a stealth tax on wealth. The government has a great racket going while they can keep it up. They print the money and they can game the price indexes that measure how much excess money they are adding to the system.

Yes, people who are invested in hard assets aren't going to take such a hit. But keep in mind that capital gains basis is not indexed, so even if you protect your wealth by investing in hard assets, the tax man is going to wet his beak when you convert them to cash.

2008 Feb 29 03:05 PM

[Andrew Hor...:]

Evaporation is a more fitting term these days..

A

2008 Feb 29 03:05 PM

[User 4326:]

It is all relative. In the early 60s a cup of coffee was a nickel. At the same time a wage of $10/hour was a lot of money for many.
Why make another scary story out of this. This is simply how the economy rolls along.

2008 Feb 29 06:20 PM

[Dr. C.:]

For user 4326 - actually it is worse then it seems. Incomes have not kept up with inflation, the standard of living will continue to fall, and the US is heading for bankruptcy and financial collapse.

Since the late 1960's the $ has lost about 90% of it's value - on average, prices have increased by a factor of about 10x. Over the same period, average household income has increased by a factor of about 7x - and in the 1960's most households were single earning households. Today most households have two earners. So even the shift to dual income households has not kept household income rising fast enough to keep up with rising prices.

If you're collecting social security or military retirement benefits (or plan to before the country goes bankrupt and defaults), increases in benefits (cola or cost of living adjustments) are calculated based on the understated official CPI. Since the official CPI annually understates the true inflation rate (and has for 25 years) current (and future) benefit levels have not risen fast enough to match rising prices. see www.shadowstats.com/ar... for a discussion of this.

I also highly recommend the link to the David Walker video that talktowen posted - here is another.
www.youtube.com/watch?...

Sound investing now in commodities and real money (gold) will help you increase your wealth but if you think the next 30 years will look anything at all like the halcyon years we've experienced in the last 30 years you are in for a rude shock. We are in for some serious problems.

2008 Feb 29 08:23 PM

[Bhakta:]

The only investment that has really done well for me the last 6 yr is funds that are based on precious metal and commodities, and shares in energy related companies. I have ZERO confidence in TECH, FINANCE, HOUSING or MEDICAL at this stage. I grew up in the 50's and remember what I could buy for one dollar then! I remember buying my first car for $100 and it was a gem.

2008 Mar 01 08:12 AM

[J.Bass:]

Investors have to think with their pocketbook and leave the debate to Washington hacks.
The inflation reduction can be overcome with the commodities that are more than outpacing the rate of inflation- gold and oil.
In those sectors concentrate on the producers that are increasing production year over year.
In gold the AMP Portfolio favors Yamana - which will nearly double production in the next four years.
In oil Suncor ( oil sands ) has two expansion projects - the first will add 100,000 barrels of production this year - you do the math.

2008 Mar 01 11:27 AM

[Barry Sotoero:]

I do not believe cutting our interest rates has anything to do with the current inflation problem, that we are just noticing. Inflation has been on the rise for years now, reflected in the rise of gold. The United States finds it very hard to believe that anyone besides ourselves could make the world spin. Although we are still the big guys on the block. The world around us is changing right in front of our eyes. Inflation is being driven globaly by the cosumption of all goods and raw materials. Chindia and others are driving inflation. The cost of oil is the main culpret, driven by supply and demand. Take a look around and see if there is anything that you can find that is not made out of oil or the machine that made the item uses oil or it is made from oil. The Goverment needs to make major advances toward alternative energies. Alternative energies to make electric, cars, raw materials and goods. We are in or near a recession and inflation is already present. Protect your investments through precious metals an alternative energies. Things will get worse before they get better!

2008 Mar 01 02:37 PM

[pharma:]

The present inflation, using early 1980s standards, is over 12%. It is really bad.

2008 Mar 01 10:06 PM

[pharma:]

Using mid 1980s standards, the present inflation is over 12%. These 4 or even 7% inflation numbers are bogus.

2008 Mar 01 10:08 PM

[fredthfox:]

Load yourself heavy into long term debt, you'll be able to pay it with worthless dollars.

2008 Mar 02 01:29 AM

[ratsharp:]

Its like managing your house expense... when costs rise ( aka inflation) , you cut down on wasteful expense ... you work hard for getting better returns i.e. look for companies that will outrun the inflationary costs... look for international assets which will grow et al.

My point is... gold is not a commodity for long term investment. It has absolutely no value ...just like art .. it just in the eyes of the beholder. If your trader tells you to buy it .. go ahead and do it ... but dont try to deceive yourself by saying that you are doing it to protect your assets from a 25 year inflation impact.... thats being lazy ..not strategic not insightful ...plain lazy

2008 Mar 02 03:20 AM

[ecoman12453:]

Why don't you take into account the severe credit crunch occurring in the US. If the fed does not continue to lower rates and inflate then there will be no lending, and that will kill aggregate supply, when that happens as demand increases because we a re a more global economy, eco 101 tells you inflation will be even worse. Also 4% is the current inflation rate by PPI, does it really discount the fact that houses declined about 10% over the last year, I mean most americans have a house worth in the $100,000s i mean $200,000-$500,000 on average, so a 10$ decline in value is like 20,000-50,000 dollars taken out, that is very deflationary compared to milk and chicken rising a quarter at the store.

Inflation is a lagging indicator as well, if we are going to see a slowdown, which i think is inevtiable then inflation will slow down, 4% is not terrible, especially when it is only going to go lower.

2008 Mar 02 10:22 AM

[Mr. G:]

I think the biggest risk to current FED theory is printing more money and supporting the banks with cheap overnight lending rates. This methodology overlooks raging global growth creating historical and unparalleled demand. In turn, inflation will probably grow to unprecedented levels. Lowering the fed rate and printing more moey is a recipe for disaster.

2008 Mar 02 02:06 PM

[User 159243:]

There is a growing perception that we are in a resource war. Only
reason we went to Iraq is to sit on top of the oil reserves. No one
knows how much oil is really left to pump from the major Opec
sources, or others, or the cost of pumping it, and to convert to
alternative energy sources, it seems you would need to get your
hand on a major amount of metals and other materials to make
the conversion. Our technological advances seems basically to
be that of shuffling information, and while that may help all resource
allocation, it does little in physically transporting people, goods or
services , or growing foods or mining. I believe our economy works
fine at 30 dollar a barrel oil, and now we have to revamp our ways
of just about everything, which will be done, but it cannot be done
overnight and the costs of doing that I think our inflationary, as
sudden price pressures emerge. Now that we are predominantly
a service economy, many in the service professions can just in
unison mark up what they are charging - like the medical sector,
the legal sector, the unionized teaching profession, and that is
because they ride off the backs of all the other businesses, but
during this transition, many businesses will not make it through
a paradigm shift, as many will experience severe income erosion,
and when you think many baby boomers have not even saved
sufficiently for retirement, thinking there house can somehow
take care of them, it is truly frightening, and even those who
have saved, now at the top of their personal wealth formation,
they are really getting rattled, as they see household wealth
destruction - plunging home values, plunging bond prices at
times, plunging equity values, and have fear of annuitizing,
thinking inflation will dissolve the income stream fast, and fear
of affording and accessing medical services. If you are in a cozy
service sector job, say dentist, nurse, gov. worker, you are fortunate, as you can keep pace, but so many rum of the mill
jobs out there are lagging behind, and that is why so many
people stooped to refinancing homes, using credit cards to get
by in the first place, so I see restaurants evaporating, beauticians
going out of business, the travel industry struck hard, just anything
you can do without. No one spends when they see wealth eroding,
so at some point, demand is going to tank in such a big way, that
other services will need to lower prices. If commodity prices go
up to such a huge level, more and more businesses will fail, like
the bike shop will shut its doors and people will get bikes from
the more competitively priced big box retailer, as people will look
now at every cent they spend. People will adapt. Generations
can double up in over sized homes. This would save on utility
bills and food, getting economies of scale. People will wear
clothes longer, buy used goods, etc. People now are forming
expectations of a lower standard of living, and that is what a
resource war is all about. Everyone knows we went to Iraq for the
oil. Now we see food prices spike. There will be nothing we can
waste in the future. This generation will move to the mentality
of our grandparents, a d Depression era mentality, they will be
more savers than consumers. This is now the age of scarcity.
It is the death of luxury goods, you would look stupid now to walk
around with a 400 dollar purse or something or show off a BMW.

2008 Mar 02 02:30 PM

[jurp:]

Forget raising prices, Mr. Dentist; there is a practise for salle in the next town, with NO bidders.
People will shun 1100 dollar root canal, and crown in favor of pulling the tooth. and getting, maybe, a bridge.

Yes, they will move into their parent's hose; vice versa, parents into their house.
Then there will be 4 million empty houses, with banks renting 5 br for $300-400 a month.

2008 Mar 02 05:19 PM

[onlytrusthim:]

In the sixtys Gasoline was .25 cents per gallon 4 gallons for a dollar. A silver dollar had the same value as a paper dollar. A weeks grocerys $25-30 a week. Today you will pay at least $12 paper dollars for 4gallons and a silver dollar is worth about $19-20. Printing FIAT money with nothing to back it up is another thing that has brought us to where we are today. Hate to see what will happen when no other countries want our dollars. Its starting already.

2008 Mar 02 05:20 PM

[j4thelonghaul:]

Have fun eating and heating your home with gold and silver and oh by the way you better have a mini-arsenal of weapons given the doomsday scenarios all of you are posting. We will adapt and re-emerge as a stronger nation because guys that is what captialism is all about. China and Russia are not capitalism....maybe they evolve but Putin certainly isn't moving in that direction and I doubt the Chineses government is ready to move in that direction either. China will have labor unrest it is just a matter of time. In the meantime the weaker dollar will make business people re-evaluate the cost of production and we will begin producing goods again for domestic and foreign consumption.

2008 Mar 02 07:22 PM

[pseydocyst:]

you people should be patriotic.
Stop buying gold and silver.
Put your money in US treasury bonds.
Support our troops and our war
effort in Afghan and Iraq.
Buy US corporate stocks, Halliburton,
Citi, MBNA, they need all the help
they can get from true american patriots.

2008 Mar 02 10:09 PM

[Michael B. ...:]

these articles come out when inflation peaks. It will within these 1-2 years (hell, even months possibly).

They are an indicator ... these prices should give incentive to finally invest in supply. Additionally, they will cramp economic growth.

staflation is an interim step to deflation.

2008 Mar 03 01:57 AM

[OctoberFaith:]

finally thank you.

2008 Nov 02 07:18 PM

[OctoberFaith:]

lower the treasurey rates.
buy foreign equities.
buy gold.

drop treasurey rates so they wont invest in US debt. they wont convert their currencies.
buy gold so they can't invest in their fear.

our dollar is going to be deflating now. thus the incentive to invest in us economies.

buy foreign equities because their markets will be getting stronger, it will restore their confidence.

so they will buy US equities because that is where the markets will be stronger.
when their dollar deflates they will start loaning again.
so they will sell oil because its price will drop.

2008 Nov 02 07:58 PM

[OctoberFaith:]

sec. im getting tired.

2008 Nov 02 08:02 PM

[OctoberFaith:]

they will

sell off oil
raise their interest rates
buy in us equities

2008 Nov 02 08:05 PM

[OctoberFaith:]

when they raise their interest rates their dollar will deflate.
they will start loaning again, so they will sell off oil
they will invest where markets are better and their is a more stable dollar.

2008 Nov 02 08:08 PM

[OctoberFaith:]

no It's sell of gold so they can buy it to stabilize their currencies

2008 Nov 02 08:15 PM

[OctoberFaith:]

yeah sell off gold.
lower the treasurey rates
invest in foreign equities.

sorry, this is not fair when I havent slept in 38 hours.


when you sell of gold they can buy it to stabilize their dollar.
the invested money in equities will stabilize their economies.
when their dollar stabilizes they will start loaning to the US again

2008 Nov 02 08:20 PM

[OctoberFaith:]

no buy gold so it stays strong cause that is where they are invested. my bad.


On Nov 02 08:20 PM OctoberFaith wrote:

> yeah sell off gold.
> lower the treasurey rates
> invest in foreign equities.
>
> sorry, this is not fair when I havent slept in 38 hours.
>
>
> when you sell of gold they can buy it to stabilize their dollar.
>
> the invested money in equities will stabilize their economies. <br/>when
> their dollar stabilizes they will start loaning to the US again

2008 Nov 02 08:23 PM

[OctoberFaith:]

yeah if we buy gold, their dollar wont deflate. they will hve a way out.
shit.
if we lower treasury rates they will beforced to invest in their economies
fixing the problem.
invest our own economies

2008 Nov 02 08:31 PM

[OctoberFaith:]

ill play this game later. for the moment i need some sleep first.

2008 Nov 02 08:32 PM