How Inflation Erodes The Dollar

I was considering the implications inflation has on my portfolio this week and I had a shocking realization.

Inflation Compounds

The power of compound interest is considered to be your best friend when it comes to your investing right next to time in the market. But the two really come together when you're really building wealth. Looking at compound interest from a mathematical perspective Albert Einstein called it "The either wonder of the world". He clearly understands math and how it works on a level that likely none of us do.

That being said, if Albert had so much respect for compound interest we need to as well. Especially when it comes to our wealth. Let's take a look at how the dollar loses it's value, compounding. Be sure to check out the weekly newsletter if you want weekly information like this.

albert einstein

Let's say you can buy a box of detergent for $1 for simplicity's sake. This isn't exactly how inflation works but it is an easy way to explain the concept of how compound interest destroys the dollar. Let's say inflation goes up 2%. The number on our dollar bills doesn't change to .98 cents. But instead what happens is that the box of detergent DECREASES in size by 2%. So effectively our dollar doesn't buy the same amount of detergent that it used to.

Here is where the compounding comes into effect. The next year inflation goes up to 7.9% ( current inflation number  for 2022 ). Again the number on our dollar bill doesn't change to 92.1 cents. What happens is that the amount of detergent we get in the box is again decreased.

In reality what happens is that the price of our products goes up and then the company also decreases the size of the portions they give... at a higher price. After all we live in a world where inflation doesn't stay at 2% and the corporate greed scale is worse than inflation.

Here is a basic table explaining how inflation compounds using MATH!

Inflation rate is typically calculated using the inflation rate formula:
(B - A)/A x 100 where A is the starting number and B is the ending number. That is a mouthful so here is a chart with this formula.
year Price Size Detergent Box Inflation
0 $1.00 100 units 2%
1 $1.02 100 units 2%
2 $1.0404 100 units 2%
3 $1.0612 100 units 2%
4 $1.0824 100 units 2%
5 $1.104 100 units --

 

If you add the inflation number together you get 10% over 5 years. But if you look at the 5th year price the value is more than 10%. It shows how inflation erodes the value of the dollar losing it's value compounding. On the short term inflation may seem very minimal but take a look at a long term chart of how inflation works.

inflation chart

My challenge to you is to be sure and figure out how to stay ahead of inflation. Here is my number 1 way for you to beat inflation without investing.

How To Beat Inflation

Check the CPI ( consumer price index ) every year when it comes time for your employer to hand out raises. Ask for a raise equal to the CPI. If you do this you'll never be affected by inflation. Here is a link to the governments CPI page for reference. Check top right box for the CPI aka the inflation rate.

This is a life skill that will pay off massively through your lifetime.

Inflation short video

 

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