Do you know how to calculate inflation rates for yourself, or do you depend on the government to “tell you” … ? The latter seems unwise. Anyone remember them telling us about weapons of mass destruction in Iraq? And if you live in Russia, I guess you believe there are no unmarked tanks and green-suited Russians in Ukraine either, do you?
It’s not trivial, actually. You either have to have some generalized tables or know your way around the buttons on the “scientific” view of your PC calculator. I’ll walk you through the latter.
First select view and then scientific. Notice there is no interest rate button. You kind of have to know what to do. First you will want to know the price you paid for something “way back when.” I bought a Frigidaire 17 cubic foot refrigerator in January 1975 for $541. Then you need the price for replacing it with the same thing today. *Not* a French door 34 cubic foot stainless with a large digital screen that provides cooking instructions and an ice maker that turns undrinkable tap water into crescent shaped cubes that don’t fit in your glass, if it works at all, for $3000. Nope, not comparable. I did upgrade though, to a Whirlpool (best brand according to my appliance repair guy, who didn’t charge for coming out and declaring the old one un-fixable) 18.2 cubic foot Energy Saver model with clear plastic bins to spare me the anguish of cleaning up 6 month old rotten tomatoes with every color but red on them that I forgot about. A pretty good deal for only $8 more.
I mean, $8 more than I paid in 1975! Yes, it was $549, with free next day delivery from Lowes, plus another $48 tax that I didn’t count. We had tax back in 1975 too. So here’s how you do this. The first part surely you know. 8/541 = 0.015 meaning 1.5% total inflation over 40 years. But we need the annual inflation rate.
First add +1 to get 1.015. This is the number you multiply times the original price to figure out the new price, like this: 549 = 541 * 1.015
Except that you need a number that you can multiply times 541 forty times to get 549. That would be the 1/40th root of 1.015. Well, 1/40 = .025. Now you need the “to-the-power-of” button on your calculator, circled in the image above, labeled x^y on most calculators. Enter 1.015, hit the x^y button, enter .025, then hit “=” and you get something like 1.0003722845930586523014953464531. Subtract -1 and multiply by x100 to get a percent, and round off to 0.037%. That is about 1/27th of a percent. Really rip roaring rate of inflation.
Actually is was deflation when you consider that raw materials are more expensive and it is larger with better features and improved efficiency. Of course, lately most people’s wages aren’t going up either, but they did for sure in the 1970s and early 1980s, and I have more stuff now than I did then.
Bottom line, if you buy the French fridge for $3000 or the i-Whatever for no-telling-what, do not complain about inflation. Those things were not available in 1975, and I don’t have or want them now, they are completely optional (and ridiculous, I hate my sister’s refrigerator and can never find anything in it, nor have I ever seen an iPhone without a cracked screen).
There is a chapter in Money, Wealth & War on inflation looking all the way back to 1800 on the prices of things like cameras (not available then, but free now with your iPhone) and houses. Guess what, houses are a lot bigger now than then, mostly closet space to hold all the stuff we have now we didn’t have then, and the price per square foot is not nearly keeping pace with the S&P 500. Even Donald Trump’s real estate did not keep pace with the S&P 500. Oh, and the new houses are energy efficient now too.
So check it out. Might be some other things in there that would surprise you, like how the idea you should be “saving for retirement” is just another government and financial industry lie. Oh you should be putting some resources aside all right, but not for retirement and I wouldn’t call it saving. I’d call it generational wealth building. You want your family to be poor forever? Subject to any old whim of layoffs? Or would you rather they be able to finance their own presidential campaign like Donald Trump, incidentally whose dad was in real estate, Trump didn’t start from scratch, and his three children are in it now. Otherwise, you or your children are going to get laid off before you have paid off your student debt, because technology is changing too fast for whatever you are learning to remain relevant for 20 years, maybe not even for 10.