How does money vanish? Let us count the ways…Number one on the list — something that will get us all — is inflation.
Do you know how much a gallon of gasoline cost in 1962? Take a guess. Ready?
A gallon of gasoline cost 31 cents. Seventeen years later, in 1979, that same gallon of gas cost 79 cents. By 1997 that gallon cost $1.39. (Source: Left-Brain Finance for Right-Brain People, 41-42) Compared to today that all sounds remarkably inexpensive.
Here’s the rub: someday we’ll look back at today’s prices and think, “Gee, gas was at least reasonably priced!”.
The best laid financial plan can be ruined if inflation is not taken into consideration. Inflation is a slow and constant erosion on your purchasing power.
What is Inflation?
Inflation is rising prices due to increased spending of cash or credit. When prices rise but our production of goods and services (GNP) does not, inflation results.
Like inflammation in the body, it can grow, spread, and cause damage to the economy.
What Causes Inflation?
Any time more money buys the same supply, prices go up. Consequently, the dollar loses purchasing power.
To use a body analogy again: inflation is like inflammation around damaged cells or an infection. It is a reaction to an unwanted condition. Just like the body routinely fits inflammation with the aging process, the economy fights inflation as a naturally-occurring economic process.
Why Inflation Won’t End
We can’t stop inflation; we can only slow it down. Inflation compounds just like interest. For example, if inflation is 4% year (low), that still means prices will double every 18 years.
Inflation Isn’t All Bad
Inflation hurts those on fixed incomes. It can also diminish the value of your money.
Some ways inflation is good:
1. When inflation is high, debtors win and creditor lose. (Yay!) That’s because each year the debtor pays money back on a fixed loan, he’s repaying in dollars that have declined in value.
2. Sometimes inflation can help create wealth. In the past stocks and real estate have been excellent inflation hedges. It’s possible to earn enough with these investments to outpace inflation.
Bottom Line on Inflation
It’s your challenge to be on guard against inflation and plan accordingly. If not, you’ll see your purchasing power diminish and your savings decrease. Don’t put yourself in a position of having a fixed income in an economy where prices keep rising.
Related:
* Even Mild Inflation is Something to Fear
* Don’t Let Inflation and Taxes Erode Your Savings
* Make Sure Your Investments Beat Inflation
February 1st, 2009 at 1:31 am
Inflation in the U.S. is terrible. The minimum wage should rise with inflation, instead the poor just keep getting poorer.
February 16th, 2010 at 5:12 pm
Hi just thought i would tell you something.. This is twice now i’ve landed on your blog in the last 3 weeks searching for totally unrelated things. Spooky or what?