Inflation is reported to be at a low 2% per year. In reality, it’s more than three times that.
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Inflation – Let’s Explore How It Effects Us
Notes for this podcast:
Inflation is the silent destroyer of personal savings. It can do this because it happens slowly over a long period of time. Inflation is often difficult to understand, as you usually can’t see how bad it effects people until it’s too late.
Let’s look at inflation to try and peel back the corner a little bit and see the ugly truth that lies beneath the facade that a little bit of inflation is normal and even desired.
A brief discussion about inflation, using a simple analogy. Let’s say you have $100 to buy gasoline with. This is what you have budgeted every month for what you need in fuel. I know that, currently, many of you are spending more than that, but stay with me here.
At $2 per gallon, your $100 can buy 50 gallons of fuel. Now, we haven’t seen the price of gas this low since early 2009, which is only 4 years ago. This is enough for several tanks worth of fuel. Keep in mind that the size of the tank isn’t the issue, it’s how much fuel you need for the entire month. So whether you need to fill up five times during the month or just two, it’s still the same 50 gallons.
Now, when the price of gas goes to $3 per gallon, you can only buy 33.3 gallons.
According to Consumer Reports News, http://www.consumerreports.org/cro/gasprices.htm, the average price per gallon of gas is now at $3.30. Diesel fuel is averaging $3.89 per gallon. I have no idea why the lower grade and simpler to make fuel costs more, but it does. And as my truck uses diesel, I’m not too happy about it.
Fuel prices are in a constant state of flux, which means they’re always changing. Up and down, up and down. Just a few short months ago, when I wrote first wrote this outline, the gas price was $3.82.
At that price, your $100 only gets you a little over 26 gallons of gas.
Right now, in January of 2013, we’re only 70 cents, on average, from gas doubling what is was only 4 years ago. My guess is that we’ll see prices near or above $4 a gallon in the not too distant future again, though who knows if they’ll stay there, going either up or down. As time goes on, though, it’s highly likely that we’ll see higher fuel prices.
When the price gets to $4 per gallon, you only get 25 gallons for your $100. We’re getting to a point where it’s about 1 tank’s worth of gas for bigger vehicles. Actually, 25 gallons wouldn’t even fill up my truck’s tank, which is 32 gallons.
Also according to that Consumer Reports News, California is paying an average of $3.62 per gallon. At that price, your $100 buys you less than 27.6 gallons of fuel.
When gas gets to $5 per gallon, you can only get 20 gallons of fuel.
You can easily see how inflation can quickly erode the buying power of your $100 bill. It takes an increasing amount of money to buy the same amount of goods, in this case, gasoline.
Let’s double the current price of gas today. At $6.60 per gallon, you’re only getting about 15 gallons of gas. Fifteen Gallons for one-hundred dollars!
Four years ago, the price of gas was $1.91. From $1.91 to $3.30 is 172% increase, or a 15% annual inflation. Hmm, this is a far cry from the 2% average that’s reported for 2012!
Another way of looking at this is you used to buy 50 gallons of gas 4 years ago for only $95.50, but in order to buy 50 gallons today, it will cost you $165. Again, that’s about 15% inflation.
Inflation was calculated using the http://www.calculator.net/inflation-calculator.html website.
It’s difficult to make assumptions like this, but if we assume that this rate of inflation for fuel continues for fuel at 15% for the next 4 years, we’ll be paying paying $5.84 for 1 gallon of gas. That’s calculating starting from $1.91 for 8 years of 15%, not starting from today with $3.30. Because of the compounding effect, it’s slightly higher than it would be if we calculated 15% per year fro four years, starting at $3.30. We would get $5.77 per gallon, instead.
I’ve covered this back in several podcasts, namely the ones on hyperinflation, but inflation is the banker’s thief. Good for them, bad for us. It’s a clever way for them to pay us back the interest they owe us with money that is worth less than it was when we initially made the loan.
Let’s quickly take a look at some other prices from January 2007 to December 2012. Here’s the PDF that shows the data that I got from the BLS website.
01/2007 – $1.15
12/2012 – $1.44
Increase of 25%
Peak Price in last 5 yrs: $1.51
GROUND BEEF, LB:
01/2007 – $2.63
12/2012 – $3.46
Increase of 31%
Peak Price in last 5 yrs: $3.51
01/2007 – $1.03
12/2012 – $1.48
Increase of 43%
Peak Price in last 5 yrs: $1.53
01/2007 – $1.55
12/2012 – $1.79
Increase of 15%
Peak Price in last 5 yrs: $2.20
01/2007 – $3.07
12/2012 – $3.58
Increase of 16%
Peak Price in last 5 yrs: $3.96
01/2007 – $3.29
12/2012 – $5.92
Increase of 80%
Peak Price in last 5 yrs: $6.07
Minus the coffee, that’s an average of 26% inflation over the past 6 years. If we run these numbers through the inflation calculator, we find that’s a 6.5% annual inflation.