The Silent March of Inflation

Excerpted from The Single Best Investment
Inflation and Dollar Devaluation
Perhaps because the monthly bill never arrives in the mail, most investors pay far too little heed to the basic underlying context in which their investments exist. That context is inflation. Since World War II there have only been two years in which inflation declined; the average annual inflation rate for the past 50 years has been 4.5%. And inflation compounds. As prices rise each year, the value of your original investment dollar declines. Inflation marches on, quietly, rarely making headlines, and static dollars fall further and further behind.

Put simply, if prices double, the value of your investment must double merely to stay the same in terms of purchasing power—and that doesn’t even begin to address the issue of having your money “go to work” for you, of getting a true investment return above the rate of inflation. And indeed, prices do double. At 4% inflation (lower than the long-term trend), prices double every 18.1 years. Think back. Twenty-five years back from this writing was 1980 (when inflation was above 10%, by the way). The cost of a new middle-of-the-line Ford was about $3,500 delivered. Today, that number is greater than $20,000. College tuitions have risen by nearly exactly the same amount. A new auto battery then cost $14, the same battery that today costs $70. In 1980 a cheap haircut cost $5. Today, even at the mall walk-in shops you’ll have to pay $15-20.

Since 1945, prices, as measured by the Consumer Price Index, have risen over 900%. Some prices have gone up even more. Health care costs rose over 200% in the decade of the 1980s alone, and continue to rise at roughly 9% per year. The “real” things we buy, such as a magazine, a paperback book, a slice of pizza, a movie ticket, a dental visit, a suit cleaning, etc., have risen two to three times as fast as the CPI in the past twenty years. Investors need to remember that in 1968 a gallon of gas cost about a quarter; as I write it is ten times that.

The Chart above shows the “progress” of inflation since
World War II.

What it shows, very simply, is that if you could buy a product or service for $100 in 1945, by 2005 you would have to spend $1,045.40 to get the same product or service. If your investments did not rise by over 1,000% during that period, you actually lost money, adjusted for inflation.

You might say that a loaf of bread in 1945 became a slice of bread by 2005, in terms of what you get for a depreciated dollar, or how many extra dollars you would need to account for increased costs. An automobile became a chassis and two tires. A whole hog became a package of bacon. A chandelier became a night light. Your $100,000 was transformed into just $9,563 of purchasing power by rising prices for everything.

So inflation is the context in which your investments exist, the starting point, the minimum benchmark against which investment performance must be measured. The inflation rate is the first hurdle you must overcome.