According to a website called The Food Timeline, back in 1916, a loaf of break cost 5 cents, a pound of sugar was 8 cents and a 10 pound sack of potatoes was 27 cents? OK; that was a long time ago, you say? How about 1962? A loaf of bread cost 20 cents, a movie ticket was 50 cents and a gallon of gas set you back 31 cents? Of course the median family income back than was $6000 a year (today it’s closer to $55,000). How about inflation adjusted values? When George Washington was paid a $25,000 annual salary to serve as US President from 1789 to 1797, we can follow the US inflation rate to come up with an equivalent of $585,000 in today’s dollars which is actually more than the current $400,000 salary President Obama is paid.
The lesson to learn here is that when you’re planning for retirement, you can budget for one set of costs and then be confronted with monthly expenses that might be quite a bit more than what you are paying now due to inflation. Interestingly, the USDA Economic Research Services cites that “The Consumer Price Index (CPI) for all food increased 0.8 percent in 2010 and is forecast to increase 3 to 4 percent in 2011.” After 2008, many investors are more worried about the ups and downs in the market than the slowly eroding value of their dollars. But now we are hearing about inflation again and how it can be dangerous to retirement income in the fairly near future.
When you look at the actual numbers, they suggest that since the end of 2007, and particularly during the economic meltdown in 2008 and 2009, the government has been injecting dollars into the global economy at an unusually high rate.
How high? The government’s website notes that M1–total currency, traveler’s checks, demand deposits and other checking account deposits–has risen 10% over the 12 months ending February 2011. M2, which adds in savings accounts and money market funds, grew at a 4.1% rate, but has risen 18% since the end of 2007. The last count shows that there are roughly 8.89 trillion dollars in the global economy. This is up from less than $1.5 trillion in 1980. However, the relationship between the supply of money and future inflation is a bit more complicated than just projecting prices to go up along the same line as money supply. According to St. Louis Fed website, inflation has not risen quite as steeply as the money supply these last 30 years.
Inflation is also caused by increased labor costs, which are firmly under control today with the high unemployment rate and outsourcing to lower-wage Asian and South American economies. In addition, economists talk about the “velocity of money;” that is, how it moves through the economy. The simplest example of why a low (or negative) velocity of money can block inflation can be seen in 2008 and much of 2009, when the Federal Reserve Board flooded the large investment banks and brokerages with money, but the banks refused to lend it. You can stuff an unlimited number of dollars in the pockets of Wall Street firms, but if they simply stuff it back into their own pockets, the result is not likely to drive up prices at the gas pump, the mall, grocery store or anywhere else. Economist Mihir Worah of PIMCO is projecting 1% to 1.5% rises in the CPI this year, which is very modest compared with historical averages but he cautions that eventually the velocity of money will catch up with the increase in money supply.
But it’s worthwhile to note that not everything has kept pace with the rate of inflation. In 1925, a brand new Model T Ford automobile cost $290. That would equal $3,500 in today’s prices which would only get you half the down payment needed for a new Lexus coupe. In 1930 and 1931, the Yankees slugger Babe Ruth earned an annual salary of $80,000–the equivalent of about $1 million a year today, or about what the .214 hitter sitting at the far end of the bench makes for the Yankees today.