EXPF61 Inflation equation

Using the data from the previous problem the inflation graph plus equation is shown below.  Take the data from the Excel spreadsheet, present the data in graphical form and have the Excel program generate the equation.

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

In this situation a simple linear plot is sufficient.  The linear equation shows a slope of approximately $700 per 5 year interval.  Using the Excel program you can easily generate a second or third degree equation and take slopes.  If manipulated properly the Excel program will do the calculus, i.e. take the slopes, for you.  If you are not familiar with this feature of Excel, it would be a good idea to take this data and try different combinations of equation and slope calculation.

The linear plot does not fit well in the early years, but after about 20 years it fits very well.  Using the data points at 2000 and 6000 and the corresponding time interval of 30 years the linear rate, the slope of this curve, is roughly $4000 divided by 30 years or $133 dollars per year.  $133 does not sound like much until you look at the devastating effect over a longer term.  At $133 per year it takes 7 to 8 years to halve the value of your money.

This data, graph and a little calculus drive home the point that "a little inflation" is devastating over a few years. At this rate a person retiring and living on a fixed dollar retirement for 8 years will have their purchasing power reduced by 50%.  Even in instances where the retirement income is indexed and the index typically is one-half of reality you will loose 25% in purchasing power over 8 years of retirement!

Action: Never retire or make sure you have a retirement income that is indexed to the real inflation.