Inflation: The sneaky thief

By Slow Dad - October 14, 2016

You may not realise it, but you have been robbed! Not just once, this has been going on for quite some time. This sneaky thief's name is Inflation.

Inflation erodes the purchasing power of your cash

You may not realise it, but you have been robbed! Not just once, this has been going on for quite some time.

The name of this sneaky thief is Inflation.

Inflation is like a monkey silently stealing your lunch.
The Inflation Monkey
It operates like a Barbary Macaque living on the top of the Rock of Gibraltar, stealing your lunch while you’re distractedly gazing at the amazing view.

Unlike your former lunch, the total amount of money in your wallet won’t have vanished (unless those thieving monkeys stole that too). What has changed is the amount of stuff you can buy with that money.

To illustrate this point consider the McDonald’s Big Mac, which first went on sale in the United States in 1967.

Big MacYearPrice
Big Mac1967USD$0.45
2016USD$5.04
The same item costs 1120% more 50 years later!

Of course not all of that price difference can be attributed to inflation alone. Applying the average annual US Consumer Price Index figures to the 1967 USD$0.45 reveals that inflation was responsible for USD$3.29 of that price rise. The remainder is due to McDonald’s improving their profit margins.

Had you stashed USD$0.45 cents in your money box 50 years ago, intending to use it to buy some lunch later, you (or those thieving monkeys) would be left mighty hungry today.

Think of the purchasing power of cash as being like an ice block melting on a hot day. The longer you leave it, the smaller it becomes.

No matter where you are, inflation is going to get you

The rate of inflation varies over time, and with location. In 2015 the annual inflation rate in the United States was just 0.1%, however 40 years earlier in 1975 it was 9.1%. Don’t be fooled by the media claiming that inflation has been conquered. It hasn’t. In 2015 Brazil had an inflation rate of 9% and Russia’s was 15.5%!

Don’t be fooled by the media claiming that inflation has been conquered.
It hasn’t.

What can you do to preserve the purchasing power of your wealth?

Standing guard over your cash, or locking it away in a vault, will not prevent the value of your money from being stolen over time. On this particular point Scrooge McDuck’s Money Bin was a fail.

Scrooge McDuck's Money Bin.
Scrooge McDuck's Money Bin won't guard against inflation.
The answer is store your wealth in a form that will hold its value over time, despite the best efforts of inflation.

The Big Mac example above demonstrated that holding your wealth in notes and coins does not protect it from inflation’s dilution of your purchasing power.

Depositing your wealth in an interest paying bank account may be marginally better. However, unless the interest you receive from the bank is greater than the inflation rate then your purchasing power is still being eroded.

Investing your wealth in assets classes that traditionally experience higher returns than inflation would likely be a better option. Examples include bonds, shares, and property.

So what?

For what it is worth I think it is important to retain enough cash to cover all your day to day expenses for a period of six months. Invest the rest. And watch out for those thieving monkeys!




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