Inflation Is Cumulative
Key Takeaways:
- Inflation is cumulative, not just year-by-year; it builds up over time affecting the cost of goods and services.
- The rate of inflation can vary each year, but even when it decreases, it typically does not negate the previous years’ increases.
- Using a spreadsheet to track the cost of an item over time can visually illustrate how inflation compounds.
- Despite occasional dips in the inflation rate, such as in 2009, the overall trend over a long period is an increase in costs, as shown by the example of an item costing $100 in 1978 rising to $448 in 2022 due to inflation.
Inflation Is Cumulative – Links:
FRED: The St. Louis Fed
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Inflation Is Cumulative – Transcript
In this video I want to talk about inflation and math.
There are a lot of people walking around the earth, not really understanding some basic math concepts.
And I want to use this video to help these folks understand what we’re talking about.
Now what you’re looking at is a chart that is provided by the Federal Reserve Bank of Saint Louis, their usually referred to as the “St Louis Fed,” and they’ve come up with this database of information, which is the Federal Reserve Economic Data.
They shorten that Federal Reserve Economic Data to the first four letters, FRED.
I am on this website a lot. It’s a free website and a treasure trove of information. And if you’re a geek, like me, you really ought to check it out. We’ll leave a link to this in the show notes.
What you’re looking at are consumer prices for the United States. This is what people normally refer to as the rate of inflation. From the period 1960 through 2022.
Now many people would look at this chart and they would say “oh here, inflation is going up. That’s bad. Right?”
Or they would look at this part of the chart and they would say “here is where inflation was going down. That’s good. Right?”
But really, the rate of inflation going up, or going down, year after year, doesn’t really give you an accurate understanding of what is going on with how things cost to you and I.
So what’s wrong with this chart?
Maybe the title of this video ought to be “inflation is cumulative,” not necessarily anecdotal, or year by year.
The best way to understand how inflation impacts you and I is to (probably) look at it differently.
And for that, I put together a spreadsheet.
Now what you’re looking at here, on the spreadsheet is all of the data that’s on this chart. I took this graph and I just plowed all these numbers into a spreadsheet. And I started with the year 1978.
I think this is going to be a better way to show you — visibly — how inflation is cumulative.
Because inflation IS cumulative!
People don’t seem to understand that.
Let’s talk about something that costs, say $100 in 1978.
Now in 1978, I was in high school, so I don’t have a lot of reference points. Maybe you do.
But we’re going to start piling year after year, after year, of inflation on top of that $100 cost.
What’s something that may have cost $100 in 1978?
Well, a good lawyer, not a great lawyer, but a good lawyer, may have cost $100 per hour in 1978.
If you have an example of something that cost $100 in 1978, put it in the comments on YouTube.
We’d like to see how that all worked out.
But I think this is a better way to see — visibly — how inflation is cumulative, by looking on a spreadsheet.
Here you’re going to see, in 1978, we purchased “something” for $100.
But the next year inflation was 11.25%. So the same thing that cost us $100 the year before, now costs us $111.
The next year inflation was 13.55%. So that same thing that cost us $100 two years ago, today, in 1980, would cost $126.
By 1982, we’ve had two more years of inflation on top of it.
This item that cost $100 five years ago (in 1978) is now $147.92.
When you look at the increase, the rate of inflation over five years, you can see how the average rate of inflation for just a five year period was almost ten percent per year, 9.78%. And the cost has gone up almost fifty percent.
No wonder people were taking drugs in the late seventies and early eighties. This is just mind-blowing to see these kind of numbers.
But wait, as they say on TV, “But wait — there’s more.”
What we’re going to do now is we’re going to take this rate of inflation — and we’re going to carry it forward to the present time.
So let’s look at the rate of inflation.
Here’s a three.
Here’s another three.
Here’s something under two percent.
Here four.
Here’s a five percent in 1990.
Here’s a lot of twos here.
Uh you can see different rates of inflation but they will all get carried through.
What we’re going to do is we’re just going to take this rate of inflation and we’re going to just going to…
Again, because inflation is cumulative, we’re just going to carry this through to the year 2022.
And you’re going to find, now what cost $100 in 1978, just by using the rate of inflation — alone — is now costing $448 in the year 2022.
We didn’t even have 2023 numbers when we did this.
Inflation is cumulative. Every single year adds something. In fact, people are happy when the rate of inflation is going down.
But we haven’t had a negative year of inflation. In forty-five years on this graph, the only number that was negative was here in 2009 — and it went down a smidge!
It doesn’t even count!
Look at that number — what cost $329 dollars in 2008, went down a buck. Big deal.
So inflation adds to your costs every single year.
That’s a really important concept, that I can’t believe more people don’t understand.
And that is the message in today’s video.
