The Surprising Effects of Inflation on Your Finances.

Problem #62: How are we supposed to survive when wages aren’t even keeping up with Inflation?

How many times have you heard, “Wages aren’t even keeping up with inflation.”? “And the cost of living is so high these days.” Let’s dig into this a little bit. And I’m sure for some folks it’s true, but on average, I don’t think it’s the case. I think we tend to get caught up with maintaining our lifestyles, and we’re willing to pay whatever it costs.

Materialism is the philosophy of the day, and it’s all about more, more, and more stuff.

And if you develop your sense of the economy and how it’s doing based on the evening news, then we have a PROBLEM.

Inflation is commonly reported to be 3% annually on average. On that everyone agrees. Actually it’s slightly lower this year at around 2%. And according to InflationData.com, when you average inflation over the last 100 years, it is indeed 3.22% annually. Of course inflation was extremely high in the ’70s and early ’80s. But let’s use the average.

And based on that average inflation, the cumulative inflation from 1913 to now is 2275%!!!

So now we have a formula to determine how the prices of various things have tracked with inflation over the last 100 years.

Initial Price x 22.75(2275%) + Initial Price = Today’s Expected Price

Expected Prices of Basic Groceries

Let’s take a look at some common things that folks bought to eat in 1920 (before the great depression), that I’m sure you still buy today and plug them into our formula.

Inflation Adjusted Prices

 Initial PriceToday's Expected Price
1/2 gal. of milk$0.33$7.84
1lb of bread$0.06$1.43
5lbs of sugar$0.97$23.04
10lbs of potatoes$0.63$14.96

Check out this site for even more grocery prices from different decades. So how do these expected prices compare to real prices today? Well, I’m glad you asked. We do most of our grocery shopping at Aldi’s. So I checked a few prices of these basics to find out for myself.

At Aldi a loaf of bread (1lb 4oz) costs $0.89. You can buy a half gallon of milk for $1.85.

What about sugar and potatoes?pototoes and dirt

Our expected price for sugar is $4.61/lb ($23.04/5lb). But that’s not even close!! You can buy 4lbs of sugar at Aldi for the low, low price of $1.89 or $0.64/lb!!! Wow, that is cheap!

And potatoes? Potatoes are $4.99 for a 10 pound bag!

Ok, what gives? I thought that inflation meant that everything should cost more. Well . . . yes and no. Inflation is based on the consumer price index or CPI. To learn more about how inflation is calculated check out this article.

But the main takeaway, is that inflation is based on the CPI change from month to month. And the CPI is based on the prices of ALL consumer goods including food, gasoline, energy, cars, clothes, medical care, and shelter. The key here is all consumer goods. So it naturally makes sense that if some items are not keeping up with inflation (basic groceries) then there must be others that are exceeding inflation.

Things that are Out-pacing Inflation

The big things that are out-pacing inflation: cars, healthcare, and houses (shelter).

Cars in and around 1913 – $600. And only the wealthy could afford them, because car loans didn’t exist.

Cars today – $25,000. Of course some cost more and some less, but I think this is a reasonable average. And that’s a 4067% increase from our initial price of $600. That $25,000 car should cost only $14,250 adjusted for actual inflation.

But of course the difference between then and today is the accessibility of loans to purchase said car. And every person who breathes (exaggeration – I know) thinks they can afford that new car, because the payment is only . . .




And . . . wages? Wages have out-paced inflation as well.

Back in 1913 the average annual income was between $800 and $1200 (depending on your source – google it)

So using our same formula, the average salary should be $1200 x 22.75 + $1200 = $28,500. Hmmm. Something doesn’t quite add up here. I thought that the average wages were around $51,000. Which is obviously much more than $29000.

Taxes! I forgot taxes. In 1913 there was no income tax. Well, actually Federal income tax was 1% with an exemption of $3000. So our average wage earner in 1913 would pay no taxes. But we are not as fortunate today. So let’s take out federal taxes of $8000 which leaves us with $43,000. Still more than $29,000.

That’s a huge difference! It seems to me that on average we are much wealthier today that our grandparents and great-grandparents living in the early 20th century.

But, but, but, I can hear the keyboards starting up. How come the cost of living is so high? And why do I never have any money left over to save?

understanding the effects of inflationThe Answer is: DEBT and MATERIALISM!!!!!!!

The things that you NEED like basic groceries, reasonable shelter, and even gasoline have not kept up with inflation due mainly to productivity increases. The things that are killing you are everything else, like your fancy-shmancy car and your rich-man-wannabe house. And your luxurious vacations that you have to take. And then of course, there’s all the debt to finance the lunacy.

Average wages are actually out-pacing inflation – by a large margin! But the lifestyle that is pushed by marketers, retailers, and TV is eating that margin and then some. And at the end of the month, there is no money left.

Take a look at your lifestyle. If you’re struggling, it’s for one of two reasons. Debt to finance luxuries, or Materialism. And if you’re using debt to finance materialism, you’re in major trouble.

So What to do?

Take advantage of the fact that the necessities are cheaper today than they ever were. It’s a great time to live in America! Just don’t get caught up in lifestyle inflation.

Sell your ridiculous financed car, and buy an older used car with cash. A car is one of the biggest money wasters that people buy. Remember, a $14,000 new car today is keeping up with inflation.

Move to a more rural area. Zero-day Finance recently wrote an article on how to retire making $30,000. Staying away from the big city is a big part of lowering your spending.

Stop eating out! Eating away from home is the most inefficient and costly way to eat.

Conclusions

Were you aware that not only have wages kept up with inflation, they have out-paced them? Even when we add in taxes, we still are doing better today than 100 years ago. Don’t get sucked in to the trap that is the average modern-day American. Debt, especially debt for luxuries, is literally killing your future.

And materialism is the destroyer of happiness and freedom all across this country.

What do you think? Are your wages out-pacing inflation? What about your lifestyle?

Let me know in the comments, and would you consider subscribing below.

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-Chris

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