Inflation: The Silent Wealth Killer

The United States Postal Service announced they are raising the price of a first-class stamp to 58 cents from 55 cents – and slowing down their delivery times, to boot. In 1975 it was possible to purchase ten stamps for a dollar; today, it will only buy one! The inflation rate for stamps since 1975 averaged 3.9% – in line with historical inflation rates. At this rate, a first-class stamp will cost $3.37 in 2067! Newman!

Inflation is the rate at which prices increase, and the Consumer Price Index (CPI) is how the United States Government measures it. Since 1914, inflation has averaged 3.22%, and at that rate, prices will double every twenty-two years. For example, a Tesla Model X could cost more than $160,000 in 2043. However, there have been several times when it spiked. From 1917 to 1920, it averaged 16.5% per year, and from 1970 to 1982, it averaged 7.7% annually. The current inflation rate is 5.25%.

If you drive a car or eat food, you probably notice prices tend to rise more than fall. Paying for childcare, healthcare, or college tuition has been a challenge as the inflation rate for these items has soared.   College tuition, for example, has increased 197% since 1996![1]

Hyperinflation occurs when inflation spirals out of control. The Weimer Republic of Germany experienced a bout of hyperinflation from 1918 to 1924. It peaked in November of 1923 when inflation climbed 29,525%! Venezuela is currently trapped by hyperinflation as prices have increased by 4,000%.[2]    Hyperinflation has primarily hit developing countries like Venezuela, Vietnam, Iraq, and Zimbabwe. Governments can also experience hyperinflation during times of war like the United States did during the Civil War.

However, a low inflation rate is healthy for our economy. Companies benefit from rising prices as the increase will flow to their bottom line.  When Pepsi raises their prices, they pass on the increase to you, the consumer. And the more you purchase, the more money they make.

Inflation is a metric not often tracked by investors. The stock market gets all the attention, but inflation may have more of an impact on your long-term wealth, especially if you don’t own stocks. Inflation can wipe out a generation of hard work without warning. If you rely on fixed-income investments like bonds or certificates of deposit, you will see the value of your assets eroded by inflation. According to Dimensional Fund Advisors, $1 invested in bonds was worth $1.49 after 94 years. Stocks, on the other hand, benefited from inflation. A $1 investment in the S&P 500 grew to $752![3] 

Another way to look at inflation is the loss of purchasing power. If inflation averages 3% per year, the dollar’s value will drop by 58% over 30 years; a dollar today will be worth 41 cents in 2051. If you park large amounts of cash in your bank account, it will lose value by doing nothing.

Your retirement may last 30 years or more, so make sure you allocate a healthy portion of your assets to stocks and resist the urge to retire your money as well. A portfolio of “safe” investments may leave you in dire straights toward the end of your retirement.

Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man. ~ Ronald Reagan

October 4, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

[1], Posted by Financial Samurai, website accessed 3/7/2018.

[2], by Noah Smith, December 19, 2017.

[3] DFA 2021 Matrix Book

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