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The Cost of Inflation: Are You Just Earning Funny Money?

The Cost of Inflation: Are You Just Earning Funny Money?

How much did you pay for a Coke® as a kid? Do you remember? It was certainly less than what you pay today.

Here are some Coke prices pulled from old newspaper advertisements:

1950:  $0.05 a 6 oz bottle (under 1 cent/oz)
1964:  $0.27, two 12 oz cans (1.125 cents/oz)
1992:  $6.98/two 12-packs 12 oz cans (2.42 cents/oz)
2009:  $3.99/8-pack of 16 oz bottles (3.12 cents/oz)

That might not seem like a huge difference, but in 59 years the price of Coke has increased by over 200%. (That’s 3.4% per year, on average.) Yet that’s tame compared to other things.

Take movies, for example. Over a similar period (1950 to 2014), the average price of a movie has gone from $0.50 to $8.35, a 1,570% increase! (That’s 24.5% per year, on average.)

And, lastly, the average price of an American house in 1963 was $19,300, while in 2010 it was $272,900, a 1,314% increase. (That’s 28.0% per year, on average.) And the 2010 price is down from a high of over $313,000 in 2007.

So how much does your take-home income buy today?

Why Is the Cost of Inflation Important?

Americans don’t think about inflation much.  That’s because we live with this myth that our inflation is so low. We don’t even bother talking about it. According to the U.S. Government, the inflation we hear about most (the one the Federal Reserve uses for a lot of banking and other monetary decisions) is targeted at an annual 2% increase, which is considered healthy for the economy.

So then why does it seem like prices, particularly for food, have gone through the roof if inflation is so low?

That’s because so many statistics in the United States are manipulated these days, to support different political agendas. Sometimes the manipulation is a result of shifting how they define what statistics are used, such as when calculating our recent unemployment levels.

Or, as in the case of the Federal Reserve above, the Government will use something called core Consumer Price Index, or core CPI, when discussing inflation. However, core CPI includes no food prices, energy prices or gasoline, so how representative can that be?

In fact, the areas that hit home hardest for everyday Americans are precisely the cost of food, energy and gasoline! (By the way, there is a straight CPI number, which includes the prices of 80,000 consumer items and which is more representative, but we hear about that one less.)

According to a CBS News report, the official inflation figure since 2011 was a 6.4% increase, just over 2.1% per year on average. If that’s so, then why has chicken gone up 18.4%, ground beef up 16.8% and bacon up 22.8% over the same period of time? Why have the cat food cans I buy gone from a low of 35 cents to an everyday price of 65 cents in the past four or five years?

Have Wages Kept Up with Inflation?

The median income is only going up about 1% per year. So every year things get relatively more and more expensive, as our dollars buy less and less. (By the way, the worst offender is probably college tuition: tuition has been going up between 6-8% per year for the past 50 years!)

The result is that a good portion of the population is struggling more and more to cover basic costs, making it even harder to be able to save for emergencies and future needs.

In fact, a Marist-McClatchy poll last week found that Americans aren’t optimistic about their chances of reaching and holding onto the American Dream.

Eight out of 10 Americans think it takes more effort to get ahead than it did for previous generations. About the same percentage thinks it will be harder for the next generation to get ahead, too.

So What Can You Do?

There is nothing specific you can do to have an impact on the market buying power of your money. But you can be smarter about how you spend and invest what you have.

Today it is infinitely more important to be aware of the cost of inflation in terms of any money you are holding in a bank with low interest rates. It means you have to work harder to invest your funds in ways that earn more than real inflation so you’re getting ahead and not falling behind.

In short, it means you getting a little more educated about your finances, the markets and what your opportunities are.

Keeping your head in the sand can be more costly than ever. No one can afford that.

Let us know in the Comments section below if you realized how much of an impact inflation is having on your buying power and on your savings and investments.

Sharon O'Day

Sharon O'Day's mission is to show as many women as possible how to become financially free for the long term.

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