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

The Cost of Inflation - © Maksym Yemelyanov - Fotolia.comClick the link right below if you’d like me to read to you:

Audio The Cost of Inflation

 

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.

xxxxxxx

Bio: Sharon O’Day fixes financial lives. She is a tell-it-like-it-is money expert with a successful career in global finance, plus an MBA from the Wharton School. Today she specializes in getting entrepreneurial women over 50 back on their game so they can have more money, less stress and more joy. With her “Over Fifty and Financially Free” strategies, they take actions that lead to their ultimate goal: financial  peace of mind.

  • http://www.magnificentu.com/ Debbie Takara Shelor

    Love the article. Rather disturbing, yet fun, revisiting the price of coke. We avoid such beverages at my home, but the point is well made. As the parent of a 15-year old, those statistics about tuition are definitely on my mind. Great wisdom. Thanks again for sharing!

    • http://sharonoday.com/ Sharon O’Day

      We’re not soft drink consumers either, Debbie, but it’s a well-known item that most people can relate to. And you’re right about tuition; I’m wondering when Americans will finally rise up and stop the craziness … fueled by “low cost” federally backed loans.

      • http://www.magnificentu.com/ Debbie Takara Shelor

        I think they’ve been brainwashed so thoroughly that to be anything, you have to own all this stuff and the only way to have it is to be up to your eyeballs in credit card debt, making payments on everything in your life from homes, to cars, to everyday purchases. I own everything outright and use debit cards exclusively. If I don’t have the money, then I don’t buy the thing. Wow is it a different way to live. But the bottom won’t fall out of my reality if I suddenly have a loss in income or an unexpected medical deal or any other deal that lasts awhile. I’m not living in a house of cards. There are ways to circumvent some of the tuition – attending community college first and then only going to a 4-year university for 2 years. In-state tuition at state schools can be vastly less expensive than other choices. And, depending on a person’s major, the in-state schools may be an excellent choice.

  • Roslyn Tanner Evans

    One of our daughters was saying that after their recent trip to accountant to get taxes done, he was thrilled they were earning more money from a 2nd job and her part time job. She said, “But we can’t get ahead. Our boys will just have to take student loans for college.” She watches where every dollar goes and this blog provides a great perspective. Sending it to her. Thanks

    • http://sharonoday.com/ Sharon O’Day

      While parents typically want to take from their retirement funds to pay for college for their children, rarely is this suggested. The children have far more time to make up for the “hit” by first making smart school choices, then paying down the loans over time. But I see too many parents reeling from paying school debt … and as a result being totally unprepared for retirement. Then we have the whole discussion about “why” tuition is escalating so rampantly … I’m glad this was useful, Roslyn!

  • Kung Phoo

    It is definitely scary how expensive everything is. Hopefully this pattern gets a little better and doesn’t continue the way it has been going. Thanks for sharing this wonderful article!

    • http://sharonoday.com/ Sharon O’Day

      Robert, I wish there were some sign somewhere that someone in power wanted to see this trend change. Unfortunately, I haven’t seen or read of any signs yet. So we need to minimize the damage, in fact, find behaviors that are either neutral or beneficial. And that comes in the form of our power of choice …

  • Meryl Beck

    Things have seemed to definitely be getting out of control with prices. I think society has gotten off track with what things are important. We work more, spend more. It’s a scary cycle. Thanks for sharing, it really puts things into perspective.

    • http://sharonoday.com/ Sharon O’Day

      Priorities have changed … both for the worse and for the better, Meryl. Fortunately, some people have shifted to a lighter, simpler life, less dependent on mass purchasing. They are shifting from “having” to “being” … in a way that brings joy without having to keep up materially with the Joneses. The people most at risk are those who are in total denial, changing nothing, including their own spending. But it’s a choice …

  • Martha Giffen

    It’s a given. Prices are going up. Wages are tricky. If people would just pay attention to (write it all down!!) their numbers, they can make better decisions. Since I’ve only known business income my whole life, it’s hard to relate to wage earners who have to depend on an increase from an employer. THAT would be scary, in my book!

    • http://sharonoday.com/ Sharon O’Day

      Being a wage earner is not a totally different ballgame, Martha. People are not stuck battling for increases with one employer … as long as they bring true value to that employer and can negotiate, knowing that there are other options elsewhere. They’re the doers. What you’re talking about are the people who do “just enough” and wonder why the employer doesn’t want to pay more … because they’ve sat in that same chair for “x” or “y” years. That same dichotomy exists among business owners, too. Some succeed and some fail, for similar attitudes!

  • http://www.i-thrive-now.com/ A. Lynn Jesus

    Great post! I agree that you always have to take stats with a grain of salt. They can seemingly be skewed according to agenda. Thanks for giving some history on prices – often I just notice one thing has gone up, but this post shows the trend!

    • http://sharonoday.com/ Sharon O’Day

      Yes, Lynn, there’s definitely a trend. But to understand what’s really going on, we need to go closer to the source to see what exactly is being used in the published statistics. The devil’s in the details … ;-)

  • Carmen M Perez ELO

    I avoid paying attention so I don’t know. I can’t help but be offended when the quality of our food and water has suffered and cost more than ever. Thanks for sharing the news.

    • http://sharonoday.com/ Sharon O’Day

      I hope that my “sharing the news” will keep you from avoiding paying attention entirely, Carmen! Even if you can’t change something, you do benefit from knowing it’s happening … ;-)

  • Alexandra McAllister

    It is incredible how prices are going up. It’s a shame that most wages do not. Thanks for sharing the history on prices, especially Coke. I used to drink it when I was a kid and though it was expensive then! Great, informative article. Thanks Sharon.

    • http://sharonoday.com/ Sharon O’Day

      It’s not just wages, Alexandra. Pressure is also felt by many individual service providers not to raise their rates because they’re concerned about losing customers. (Until the economy is truly robust, that will be the case.) But that sure doesn’t stop the generalized price increase of products that people need, does it?

  • http://www.howcanyoufindlove.com/ Lorii Abela

    Good one! I agree with your blog! We all should be smart with our finances! Thanks for sharing this!

    • http://sharonoday.com/ Sharon O’Day

      You’re very welcome, Lorii!

  • Scott Glaze

    I agree that inflation has a big impact on both buying and saving. Unfortunately it is probably hitting the saving more than the buying.

    • http://sharonoday.com/ Sharon O’Day

      It’s easier to manipulate the savings end because rates are decided in a centralized place: initially the Fed. As for the buying, there are too many individual companies making pricing decisions and they’ll do what they have to in order to protect their margins …

  • Nate Leung

    I’ve come to realize that I can’t believe everything that I hear to a T. There’s so many things being said on a regular basis, it’s hard to keep track of what’s true and what’s not true. Thanks for pointing this out. This gave me something to think about!

    • http://sharonoday.com/ Sharon O’Day

      I’m glad the article could point out places were you have to look a little deeper, Nate. The “soothing” message being promulgated throughout serves political purposes, but doesn’t serve everyday citizens who have to make everyday decisions …

  • Duchess Sherri Ann

    Inflation is insidious. Like you say it creeps in little by little. I buy less Coke now but that’s not entirely a financial decision. My investments these days are in dividend paying stocks with the divs being reinvested. But inflation and the whims of the stock market keep my total investment growing ever so slowly. And, I am the point where I now have to take a RMD from my IRA. Happily I am still working and still make contriubutions, so I take the RMD from the traditional account, pay the tax and then deposit the remainder into my Roth accoount. But overall my accounts are not growing as fast as they could w/o inflation eating away at them. In 2012 I made an average of over $900/mo in divs but in 2013 I made only an average of $760/mo. No wonder that, at age 72, I’m still working. Just sent a job application to TX. A no state income tax state. Higher sales tax but am not buying a lot of taxable items these days – don’t need many ‘things’. Miss traveling though. Have to save a long time now in order to take a trip anywhere. Oh me, oh my, will it ever end?

    • http://sharonoday.com/ Sharon O’Day

      You have obviously been a keen student of how your money works for you (or doesn’t), Sherri. Your knowledge has served you well, even if it is falling somewhat short at this point. There is so much manipulation of markets that it’s difficult to know what offers “acceptable and steady” returns these days without the risk going off the chart. It definitely takes being more astute than ever! And congratulations on your proactive attitude: while the cost of a move can be considerable, in some cases it does make sense. I know you’ll do the best thing …

  • Tereza

    Smart spending is more important than ever!

    • http://sharonoday.com/ Sharon O’Day

      So true, Tereza. Unfortunately people aren’t necessarily spending smarter, regardless how important it might be …

  • http://workwithjoanharrington.com/ Joan Harrington

    Fantastic post Sharon!!! Love the value you put in this blog post on inflation, thank you for sharing :)

    • http://sharonoday.com/ Sharon O’Day

      Glad you found value in it, Joan. That’s my goal! ;-)

  • Wingate Wyndham Sulphur

    Great points Sharon! It is hard to see big changes over small times, but when you put it like this it is clearer.

    • http://sharonoday.com/ Sharon O’Day

      So many things can change unnoticed if they change slowly enough. It’s when you take a historical perspective that it becomes evident!

  • Simona R.

    It’s hard to grasp the inflation for common people and you did a great job explaining it, Sharon!

    • http://sharonoday.com/ Sharon O’Day

      Thanks, Simona, for the compliment! Did you not face inflation before you came to the U.S.? I know I did: 45% was normal in Brazil for many years, going all the way to 1,000+% per year!

  • Diana Foree

    The general public hasn’t a clue about inflation. Not only is the cost of everything rising but the size of items are getting smaller; less more a high price tag. When you go to the grocery store and you check out, you definitely see a sizeable increase in the bottom line total. It’s only going to get worse. Thanks for sharing!

    • http://sharonoday.com/ Sharon O’Day

      You’re right, Diana, that’s why I used per-ounce pricing for the Coke. And I agree, by no means is this trend over. In fact, we should have had a strong market correction by now … but monetary manipulation has kept normal market forces from reacting. Will they eventually? Depends upon how long government wants to avoid taking action and simply kick the can down the road.

      • Diana Foree

        Agree to your reply especially the last sentence. Sadly for us, they appear to like playing that game

  • Robin Pedrero

    I learn so much from you. I am glad I found you and your blog. You are a good teacher, explaining in such a way that it makes so much “cents”. wink I know life is more expensive but I never thoughts about the percentage of increase, and when you read those black an white figures it’s a bit daunting.

    • http://sharonoday.com/ Sharon O’Day

      Somewhere along the line I learned how to simplify concepts and communicate them effectively, Robin. (Don’t ask me where!) So I take joy in sharing what I’ve learned through studies and life … especially when people put the information to use by taking action! ;-)

  • Heather Cameron

    Although I’m not American I think the number are similar everywhere. Great information. We have to be smarter about how we spend. There is so much push now, even more with smartphones and social media, to spend.

    • http://sharonoday.com/ Sharon O’Day

      Heather, these issues are not unique to the U.S. How they work their way through the economy might vary, but keeping a careful eye on one’s money is good policy no matter where one lives!

  • http://xeeme.com/CarlyAlyssaThorne Carly Alyssa Thorne

    very important information to know, thanks for another amazing post Sharon.

    • http://sharonoday.com/ Sharon O’Day

      My thanks to you, Carly, for stopping by.

  • Pingback: The Cost of Inflation: Are You Just Earning Fun...

  • Veronica Solomon

    This is a really important subject. People often forget that when they plan for retirement. I recently decided to increase my fees with inflation playing a major role in the decision.

    • http://sharonoday.com/ Sharon O’Day

      Good for you, Veronica, for being proactive in the face of rising generalized costs. Too many people feel that the economy is not strong enough for clients to absorb a fee increase, but if your quality and service are good, clients will understand your rationale.

  • Lynn O’Connell

    I was a young adult in the early eighties when inflation was high. That has definitely shaped my world view. I remember talking to a mortgage broker who wanted me to get an adjustable mortgage with no caps at all… I thought he was crazy, he thought I was too conservative. Of course, I remember when mortgages were briefly at 18%, so I believe it can happen! And, when I told him my mortgage on my first condo was at 10.5%, he gave up on trying to convince me to change my mind.

    • http://sharonoday.com/ Sharon O’Day

      My respect for inflation comes from the fact that it was “normally” 45-46% per year when I was a young adult in Brazil. And it exploded to 1,000+%. The Brazilian government had the will to take the measures to break the back of that inflation (as they did in the 80s when they shifted all vehicles from imported diesel fuel and gasoline to locally grown, sugarcane-based alcohol). I’m not so sure our government here could muster the same will.

  • Wingate Wyndham Sulphur

    I see it everyday! I bought a candy bar yesterday and it was $1.25. I was thinking at the most $1.07. Not to mention gas went up 10 cents yesterday….ugh!

    • http://sharonoday.com/ Sharon O’Day

      The increases are everywhere, Heather. You have a baby? Watch diaper prices, baby food prices, clothing prices. No sector is protected. But you won’t see those increases influencing certain popular statistics. After all, who wants to give bad news?

  • Gillian ~ Gilly

    Education is the most frightening to look at and I’ve got 3 kids to get through. Definitely the small percent raises are not keeping up with inflation. Great article Sharon!

    • http://sharonoday.com/ Sharon O’Day

      Education IS a real stumbling block, Gilly. It will require looking at all sorts of options and making good judgment calls regarding the TRUE value of an educational program a child thinks he or she wants to pursue. “Eyes wide open” is probably the best mantra … ;-)

      • Gilly G Fisher

        Thanks Sharon, it’s nice to get this advice. We have a university and college locally that are very good, so it’s cheaper to keep them at home. It’s when one wants to venture afar expenses start to rise with housing. I will definitely follow this mantra! Thanks again :)

  • Ana Maria Batista Verrusio

    I feel quite fortunate that there is someone out there like you, pointing things out to us that we would otherwise not be aware of.
    What I do know and recognize is that our middle class is disappearing rapidly! I study history and spent part of my childhood in a communist country; I am shocked that others don’t believe we have a problem.

    • http://sharonoday.com/ Sharon O’Day

      AnaBanana, having spent my first 20+ years overseas and worked abroad a good part of my career, I’m as aware as you are of the changes that can take place in a country. While I stay away from politics (and religion!) in my articles, I can’t NOT point out where statistics and trends are putting readers’ finances at risk. I’m glad you find that useful and appreciate the kind words!

  • Robin Strohmaier

    Great article, Sharon, as always. You bring so much to your articles and this is definitely a subject that we all have to face. It is amazing to see how the price of Coke has increased over the years. The one that has stung the most over the years is gasoline prices and like Gilly said, the cost of education.

    • http://sharonoday.com/ Sharon O’Day

      Robin, depending what stage we are in our lives, we’ll see different items most affected by rising prices. But in the end, we all get hit by generalized inflation. Having lived in a country where 45% per year was “normal,” and where it went to over 1,000% … I get nervous when I see things being reported deceitfully!