Wednesday, May 6, 2009

Inflation

Want to have some fun poking around in historical data? A friend once told me that his dad paid off his home loan in about 10 years and now, a generation later, it takes most young people his age group 20 and even 30 years to pay off their home loan. Today our salaries are higher. How come that we actually need more time to pay of the mortgage? Could it be that we are actually poorer?

There is this little thing called inflation, a form of silent tax that the government imposes on us in a more or less secretive fashion. On this site there are a lot of historical charts showing prices of a wide variety of things adjusted by inflation. Browse around just for fun. There are a few surprises waiting. The chart I liked most was the one on US average hourly earnings: Today we earn as much as in 1940! Since 1974 it is steadily downhill, for 35 consecutive years we are earning less and less and we have now reached the earning level of 1940. Wow!

Inflation and the consumer price index (CPI) can be measured in many ways. The government continues to change the formula how the CPI is computed. One has to be very wary about the governmental CPI. Alternative inflation formulas (like fixed consumer good basket index) should be used alternatively to CPI to get a better understanding of the real inflation. One alternative measure for the inflation is described in this whitepaper on The Truth about CPI from Euro Pacific Capital.

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