The Biz of Pacelinebiz

Turning things on end to achieve results!

Inflation wrap up

with one comment

In the summer of 2008, right before the current recession hit with a vengeance, all signs were pointing to inflation hitting levels not seen since the early 1980’s.  If you think back, oil prices were at record high prices and the demand for food was pushing the limits of supply.  Food prices were also increasing at higher rates than seen in many years.  There was much speculation that we would encounter inflation above 6% for the first time since 1982. To add to inflation worries we now have had a year of money printing and a record deficit to stimulate the economy.  

To wrap things up on our topic of inflation let’s look at the effects of inflation on your purchasing power.   Since 1983, inflation has remained at a relatively low rate.  Other than a jump in inflation in 1990, the inflation rate has remained below 5% since 1983.  After 1991, the highest annual rate of inflation has been 3.39%.  See table below*:

Year

Rate

 

Year

Rate

2008

3.85%

 

1990

  5.39%

2007

2.85%

 

1989

  4.83%

2006

  3.24%

 

1988

  4.08%

2005

  3.39%

 

1987

  3.66%

2004

  2.68%

 

1986

  1.91%

2003

  2.27%

 

1985

  3.55%

2002

  1.59%

 

1984

  4.30%

2001

  2.83%

 

1983

  3.22%

2000

  3.38%

 

1982

  6.16%

1999

  2.19%

 

1981

10.35%

1998

  1.55%

 

1980

13.58%

1997

  2.34%

 

1979

11.22%

1996

  2.93%

 

1978

  7.62%

1995

  2.81%

 

1977

  6.50%

1994

  2.61%

 

1976

  5.75%

1993

  2.96%

 

1975

  9.20%

1992

  3.03%

 

1974

11.03%

1991

  4.25%

 

1973

  6.16%

*Source Bureau of Labor Statistics 

 As long as inflation is stable and modest, wages can be adjusted in step with inflation and purchasing power is not affected.  Typically, wages adjust on an annual basis so if inflation is growing rapidly purchasing power erosion will occur.  Inflation can be viewed the same way as interest but in reverse.   Here are few facts regarding inflation’s effects on purchasing power.  An item costing $1.00 in 1973 would cost $4.91 in 2007 due to inflation’s effect.   Let’s compare inflation’s impact on purchasing power over several 10 year periods. 

An item that cost $1 in 1973 would cost $2.31 in 1982

An item that cost $1 in 1983 would cost $1.45 in 1992

An item that cost $1 in 1993 would cost $1.27 in 2002

An item that cost $1 in 1998 would cost $1.29 in 2007

That $5 dollar bill in your pocket in 1973 will spend like a single in 2007.  A twenty from 1973 is now worth about 4 bucks. A fifty is worth about $10!

In the “low” inflation era from 1985 to 2007 the purchasing power of a dollar was reduced to 52 cents in 1985 dollars. 

Stated another way, the item costing $1 in 1985 had almost doubled to $1.97 by 2007. 

Many experts predict that once the recovery begins in earnest we will probably see higher inflation. They believe the increased money supply from the US stimulus and stimulus packages from governments around the world will re-ignite the inflation fire that was temporarily put on hold. One of the few upsides to inflation is paying back debt in devalued dollars.  After the credit bubble of 2008 there is no shortage of individuals and companies with lots of debt.

For next week’s blog we will take a break and discuss something a little more light-hearted.

Advertisements

Written by pacelinebiz

October 12, 2009 at 8:10 pm

Posted in Business

One Response

Subscribe to comments with RSS.

  1. I wondered why the tooth fairy was leaving 5’s and 10’s…sheesh

    Jill

    October 13, 2009 at 8:51 am


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: