EXPF60 Inflation 

Inflation can be shown through graphs and equations.  And these equations and graphs can be used as a guideline in predicting future inflation.  (We will not get into the formal definition of monetary inflation vs. price inflation and take these numbers to indicate inflation as measured by a typical consumer.)

Data from UBS, a major banking institution, shows a decline in the value (purchasing power) of a nominal $1000 using 1960 as a base year. UBS has presented this data in the form of a table of the amount of dollars that would purchase the same amount of 1960 goods and services for the typical consumer. The data may be from government statistics, government data on the amount of money printed or the published government inflation indexes. 

This data is shown in the accompanying spread sheet.

The total inflation is based on the $1000 for 1960. The number in the value column is the number of dollars required to purchase the same "things" as the $1000 would  in 1960  The inflation rate is the rate over the five year interval taking the number at the start of the interval as the base. For example between 1975 and 1980 the dollar number goes from the $1818 to $2783.  The ratio for this interval is 2783 – 1818 = 965 divided by the number for the start of the interval with the result presented as 53%.  The inflation rate for "yr avg" is the average inflation rate per year over that interval.

The first thing to graph is the amount of dollars required to purchase a nominal $1000 amount in 1960.

In this graph the year 1960 is where the graph starts with each horizontal interval 5 years.

Notice that the graph is pretty much a straight line after about 1980.  Look at the rate of inflation which bears this out.  After about 1985 the rate fluctuates but is reasonably constant. 

One conclusion from this is that even at a "modest" year over year  rate of inflation the traditional saver of dollars is really "killed" by this "modest" inflation.

Action: Never leave savings in dollars.  Find something that increases in value commensurate with the decline in purchasing power of the dollar.  Since 1960 the dollar has declined in "value," purchasing power wise, to roughly one-seventh of its 1960 value. Put another way the dollar has lost approximately 85% in "value."

Note: The year over year inflation rate looks to be around 3% or less indicating that the UBS data is from the government published inflation index. Independent researchers have indicated that the government inflation index is about half of reality.

Equations will be taken up in the next problem.