Inflation, inflation, inflation. We’ve heard a LOT about it over the past couple of years! It went way up for quite a while, making everything more expensive, but now it’s come back down to much more normal levels. But if the inflation rate has come down, then why are we still paying more for everyday things?
Part of the answer is consumer behavior, but that’s only part of the story. The bigger part is something we really never hear about: cumulative inflation. So, let’s take a look!
Here are Five Fast Facts on cumulative inflation:
- 🥪 Inflation Basics - To refresh your memory, inflation is economy-wide price increases that reduce the value (or buying power) of your money. An example would be if a burger costs $2 today, and then we see 10% inflation, the same burger costs $2.20. It’s the same burger, but it takes more of your money to buy it because inflation has reduced the value (or buying power) of your money - the same $2 can no longer buy that same burger. Also, now we’re hungry!
- 🏪 What Prices? - When it comes to measuring overall prices, economists use the Consumer Price Index (CPI). Every month they look at the prices of thousands of products and services across a broad spectrum of all industries. This creates a solid representation of overall prices that affect pretty much everything and everyone.
- 🔍 Breaking It Down - The problem is that inflation is usually reported by month or year. Breaking it down into smaller time periods makes it easier to measure periodically, but that hides the true increase over longer periods of time. It’s hiding in plain sight, but still hiding.
- 😱 It Adds Up - Inflation is like interest in that it builds on itself over time. A rate of 3% this year means next year’s rate includes this year’s 3% before whatever next year’s rate is. It builds in today’s cost tomorrow, and the day after that, and so on. So, while the average inflation rate since 1913 is only 3.24%, the cumulative inflation over that time is a mind-boggling 2000%!
- 📈 Where The Rubber Meets The Road - The CPI in 1913 was 9.8. In 2022 it was over 296. That means something that cost about $10 in 1913 cost almost $300 last year! The huge majority of that cumulative increase happened since 1940. It’s like a burger made out of gold!
🔥Bottom line: This is why prices haven’t gone back down even though the inflation rate has. Today’s 3.7% inflation rate includes last year’s 6.5%, the 7% the year before that, and so on…aaaaaaalllll the way back. So prices will almost always go up - the increases are baked in.
There’s nothing you or I can do to impact inflation, cumulative or otherwise. All we can do is change our daily decisions, spending our money on cheaper alternatives, paying down our debt, investing wisely, and generally making sound financial decisions for our own lives. And then hope the government does the same.
What do you think should be done to fight inflation?
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