How much did your first car cost? What did you pay for your last one?
The erosion of the real purchasing power of wealth is increasingly a topic of conversation I’m having with clients, family, and friends. Whether the discussions have centered on why holding too much cash may be a money losing proposition, or why taking risks can build wealth over time, the central them has been inflation.
Even though estimates for future inflation over the next decade are relatively low, a little over 2%[i], anecdotal evidence of rising prices are everywhere.
House prices rose 6.9% from the first quarter of 2017 to the first quarter of 2018.[ii]
Industrial metals are up about 40% since the 2016 election.[iii]
Wood prices have risen 66% over the past year.[iv]
When the prices of goods and services increase over time, we can buy fewer of them with every dollar we have saved.
Inflation is an important element of investing. In many cases, the reason for saving today is to support future spending. Therefore, keeping pace with inflation is a crucial goal for many investors. To help understand inflation’s impact on purchasing power, consider the following illustration of the effects of inflation over time. In 1916, nine cents would buy a quart of milk. Fifty years later, nine cents would only buy a small glass of milk. And more than 100 years later, nine cents would only buy about seven tablespoons of milk. How can you potentially prevent this loss of purchasing power from inflation over time?