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Inflation Can Greatly Reduce Your Purchasing Power Over Time. If You Paid More For Your Last Car Than Your First House, Then You Know The Power of Inflation.
11/01/2022
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By Lars Olson, CFP®, ChSNC™, CPFA, CAP®, CRPS®
President, Wealth Advisor
Alluvial Private Wealth
It seems there is a lot of talk about inflation these days. Inflation is the rising cost of goods from the gas pump to the grocery store.
Based on recent data, inflation has risen at a rate of about 2.6% in the 12-months ending in March 2021. That may not sound too bad, however, in the 12-months through February 2021, the rate was 1.6%. In just one month, the rate jumped from 1.6% to 2.6%, and that’s a lot.
To understand how inflation affects your purchasing power over time there’s a math shortcut known as the Rule of 72. It’s a simple way to determine how long it would take for something to double in value - assuming it earns interest at a given rate. Here are a few examples:
- If growth is rising at 8% per year, divide 8 into 72, and you get 9. That means it will take
9 years for something growing at 8% per year to double.
- Or let’s say something is growing at 12% per year. Divide 12 into 72, and you get 6. It takes 6 years for something growing at 12% per year to double.
Back to inflation. At the 1.6% inflation rate from February – it would take prices 45 years to double. At the 2.6% inflation rate from March – it only takes 27 years to double. Seemingly small increases in the inflation rate will cause prices to double much more quickly.
Now, let’s think about inflation over a person’s lifetime. Some of our clients paid more for their last car than they did for their first house. In fact, one of our colleague’s parents paid just $6,500 for their first home in Toledo.
Here’s the point – there’s lots of discussion about inflation. The impact of inflation on your purchasing power is very real over the 30-or-so years you are retired. It’s important to make sure that your financial plan includes a strategy for a rising income to protect your purchasing power against inflation.
President, Wealth Advisor
Alluvial Private Wealth
It seems there is a lot of talk about inflation these days. Inflation is the rising cost of goods from the gas pump to the grocery store.
Based on recent data, inflation has risen at a rate of about 2.6% in the 12-months ending in March 2021. That may not sound too bad, however, in the 12-months through February 2021, the rate was 1.6%. In just one month, the rate jumped from 1.6% to 2.6%, and that’s a lot.
To understand how inflation affects your purchasing power over time there’s a math shortcut known as the Rule of 72. It’s a simple way to determine how long it would take for something to double in value - assuming it earns interest at a given rate. Here are a few examples:
- If growth is rising at 8% per year, divide 8 into 72, and you get 9. That means it will take
9 years for something growing at 8% per year to double.
- Or let’s say something is growing at 12% per year. Divide 12 into 72, and you get 6. It takes 6 years for something growing at 12% per year to double.
Back to inflation. At the 1.6% inflation rate from February – it would take prices 45 years to double. At the 2.6% inflation rate from March – it only takes 27 years to double. Seemingly small increases in the inflation rate will cause prices to double much more quickly.
Now, let’s think about inflation over a person’s lifetime. Some of our clients paid more for their last car than they did for their first house. In fact, one of our colleague’s parents paid just $6,500 for their first home in Toledo.
Here’s the point – there’s lots of discussion about inflation. The impact of inflation on your purchasing power is very real over the 30-or-so years you are retired. It’s important to make sure that your financial plan includes a strategy for a rising income to protect your purchasing power against inflation.
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