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June 10, 2007

Excellent reply to Mother G. Speaks

Filed under: Uncategorized — grimgold @ 10:00 am

Dear Mother Grimgold,

Thank you very much for your candid and important talk about inflation. While, your example is simple and easy to understand and while I was always taught not to question or correct my elders, I did want to point out why things are even a little worse than your example illustrates.

> In ten years, prices have easily increased 30% (that’s only 3% per year).

The effects of inflation are compounding, similar to compounding interest. So to realize 30% inflation over a period of 10 years, you need only have an annualized inflationary rate of about 2.66%. If you have an average annual inflationary rate of 3% then over a 10 year period your purchasing power would have actually decreased by 34.4% (over one third). That means that at 3% annual, in any given 24 year period the effective cost of goods and services doubles!

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