Awesome inflation calculator

[ats5g]

Annual Inflation Rates in the United States, 1775 - 2006, and United Kingdom, 1265 - 2006

Interesting that inflation from 1800-1900 was -0.40% per year. No wonder bond yields were so low in the beginning of 1900's.

- Alec

 

[Nords]

Interesting that inflation from 1800-1900 was -0.40% per year.

I hope that website's data doesn't imply that they actually know what inflation was during those time periods. 745 years of data for the UK? How long has there been a UK, let alone a currency to calculate their "inflation"?

I feel so sorry for our ancestors who had to get through life without "hedonics"...

 

[Robert the Red]

745 years of data for the UK? How long has there been a UK, let alone a currency to calculate their "inflation"?

I believe that such statistics are based on records of the price of a few basic commodities, such as wheat.

As for the UK as such, it came into existence with the Act of Union of 1800: http://en.wikipedia.org/wiki/United_Kingdom#History. Before that, the country went by various names, probably in an attempt to evade its creditors. ("Kingdom of England? Sorry, they moved away. No, I don't have a forwarding continent.")

 

[cute fuzzy bunny]

Way too funny Robert.

Yep, deflation was king prior to the last century.

 

[SecondCor521]

Can I hijack your thread a little?

My son asked me why we had inflation. He already knew that prices go up a little all the time, he wanted to understand the mechanics. So I gave him an explanation as best I could (leaving out the part about how the Federal Reserve adjusts the money supply, because I was a little fuzzy on that part).

But I am now wondering myself "why?" on a deeper level. I *think* that the US govt goal is to have "moderate" inflation in the range of 1-4% per year. But why not shoot for currency stability where inflation=0%? Or slight deflation of 1-2% per year?

2Cor521

 

[Gumby]

I will leave it to the more economically literate to give you a fuller explanation, but I believe you never want deflation because it causes economic activity to grind to a halt. People will not spend money today (discretionary spending) and businesses will not invest, because if they wait until next year, the thing they want to buy will be cheaper. As sales contract, wages contract, and unemployment surges, such that even though things are cheaper, people cannot buy them. If it gets bad enough, you end up with the Great Depression.

 

[aenlighten]

The gold standard was deflationary

Because economic growth raises output but the amount of gold is almost fixed. Actually there were booms and busts in the 19th century as new mines and veins were exploited and new recovery techniques were developed but these were erratic. Wages, prices, contracts, and loans are sticky against declines. A stable inflation rate near zero is desirable but if it slips below zero the monetary authorities have no tools to control and stimulate the economy so a low positive rate is desired.

Put another way, low inflation prevents depression by allowing real interest rates to go negative during recessions. Otherwise there is no incentive to lend then.

 

[lazygood4nothinbum]

i only found this fire site after i quit work but one of the things i am most grateful for is having my eyes opened here to the ravages of inflation. it is fortunate that i stumbled on dory's site shortly after quitting work and that i am fiscally conservative by nature so my budgeting was not too far off.

still, because of the knowledge i've gained here i was able to set another friend straight who also had not considered what inflation would do to his stash 30 years down the line. thank you all.

 

[kcowan]

...But I am now wondering myself "why?" on a deeper level. I *think* that the US govt goal is to have "moderate" inflation in the range of 1-4% per year. But why not shoot for currency stability where inflation=0%? Or slight deflation of 1-2% per year?
2Cor521

My take is the the government needs to have constant inflation to make their excessive debt go away. If I can borrow to buy say a $100k investment at 5% and inflation is running 4% real, then I am motivated to do so because my net cost is only 1% so I am motivated to buy and that purchase stimulates the economy. But as I buy and sell, I am paying taxes so I am underwriting the government money machine.

 

[cute fuzzy bunny]

Inflation is caused by too much money chasing too few goods, combined with everyone wanting to get paid more for what they do and more for what they're selling.

Take a good look at investments these days to see the effects of too many chasers of too few goods.

 

[LOL!]

We need inflation so that everyone can get a yearly pay raise but not really be making any more real money. It makes you feel good.

 

[d]

But I am now wondering myself "why?" on a deeper level. I *think* that the US govt goal is to have "moderate" inflation in the range of 1-4% per year. But why not shoot for currency stability where inflation=0%? Or slight deflation of 1-2% per year?
2Cor521

there are at least two good reasons:
1) deflation is a horrible affair ... if the inflation target is 0%, the risk of deflation is higher than if the target it 2%
2) many prices (including wages) are "sticky", especially on the downside; but "real prices" (a given price relative to inflation) can easily adjust downward if general inflation increases.

 

[yakers]

Although it goes back earlier, the early US Treasury (Hamilton era) advocated for a small inflation level like .5% as it keeps money invested rather than stuffed in mattresses. Also it makes for some easier or at least less visible financial adjustments, say your house goes up 1%, your pay 2% and inflation 3%; after 10 years you have an adjustment but it looks like everyone has more.

 

[Lsbcal]

I believe a central banker of today would tell you that we need a little inflation because their tools would become less useful in a deflationary environment. With deflation interest rates are very low (say 0.25%) and the Fed would have trouble lowering short term rates enough to start pumping up the economy -- can't lower rates below zero percent.

As others have mentioned there are also behavioral reasons why a little inflation is a good thing.

 

[teejayevans]

I believe a central banker of today would tell you that we need a little inflation because their tools would become less useful in a deflationary environment. With deflation interest rates are very low (say 0.25%) and the Fed would have trouble lowering short term rates enough to start pumping up the economy -- can't lower rates below zero percent.

I forget which central banker said it when asked about deflation:
"I can always print more money"
TJ

 

[Lsbcal]

I'm not an economist but Japan had a tough time getting out of their deflation. Is it as simple as just printing more money?

Les

 

[TromboneAl]

Here's a practical inflation calculator that I use frequently:

CPI Inflation Calculator

When someone says something like "I can't believe I drove across the country in 1964 with only $800 in my pocket." I can tell them that they really had $5,333.83 dollars in their pocket.

 

[ESRBob]

Trouble with deflation: why would anyone buy something today if they think they can get it cheaper tomorrow by waiting? Borrowers would be reluctant to borrow money (and pay interest no less) if they thought they'd have to pay it back later with more valuable dollars. I can't actually get my head completely around it, but it would seem to put the brakes on a lot of economic activity we take for granted. Would the bank give you a negative rate of interest? "Sure, we'll take your $100 deposit -- you'll get back $98 next year, or a whopping $92 if you let us keep it for you 5 years." (Yakers' point about keeping your money in your mattress).

 

[greg]

Annual Inflation Rates in the United States, 1775 - 2006, and United Kingdom, 1265 - 2006

Interesting that inflation from 1800-1900 was -0.40% per year. No wonder bond yields were so low in the beginning of 1900's.

- Alec

If I remember correctly, England/Great Britan has records of land and farm prices that go waay back. This is where most of their inflation information comes from. There were certainly minor fluctuations in those prices over time, for instance when the price of wheat or sheep or wool, etc. went up folks were more willing to pay a higher price for farm land during those opportunistic times, so just watching the price of land in a primarily agricultural environment was probably a pretty accurate way of measuring inflation or deflation--if one mildly smoothed out the bumps.

(As an aside: I suspect if we just closely watched the price of industrial land, residential property, or perhaps farm land today, or some simple combination we might have a more accurate longer-term indicator of inflation in this country, uncluttered by hedonics, politics, fear and euphoria . . . if one mildly smoothed out the bumps. Sometimes [-]gov't[/-] folks make things too difficult; sometimes they make things too simple. )

 

[ashtondav]

Although England goes back centuries. I think we like to consider that our emerging consciousness as a nation really started round about the 13th century and the signing of the Magna Carta

The Magna Carta (Great Charter) was first issued in 1215 by King John.

Magna Carta was not a medieval bill of rights for the king's subjects. It was a last ditch attempt to stop a civil war - but had the opposite effect. John made himself very unpopular during his reign by his constant demands for money. The leading barons tried to impose limits on his powers by drawing up Magna Carta.

After John's death, opponents of the Crown periodically seized upon key sections of the charter in defence of their 'rights'. During one such crisis in 1297, Magna Carta was formally recognised as the law. Three important clauses still form a part of English statute law today. The two most well known are:

• 'No free man shall be seized or imprisoned, or stripped of his rights or possessions ... except by the lawful judgement of his peers.'
• 'To no one will we sell, to no one deny or delay right or justice.

With the American War of Independence we Brits gave you newbies two clauses from Magna Carta which became the fifth and sixth amendments of the American Constitution.

We have plenty of documentary evidence of economic growth and decline over the last 7 or 800 years. Running that data through firecalc would add lots to the safety or otherwise of the 4% SWR. Arguably the worst time to retire would have been in the "dark ages", starting in 410 and ending 600 years of gross inhumanity later. Of course a life expectancy of 30 years would have helped enormously as would the unavailability of SUVs.

 

[TromboneAl]

Trouble with deflation: why would anyone buy something today if they think they can get it cheaper tomorrow by waiting?

In a sense, we have rampant deflation in computers and electronics, apart from hedonic adjustments. I haven't purchased an iPod because I know it will be a lot cheaper in the futre, but that hasn't stopped a lot of others.

Apple Matters | How Much Cheaper Is the iPod Going to Get?

 

[ESRBob]

Al,
Cheaper and better, actually. We have long somewhat heated conversations around the dinner table with my teenage sons about the benefits of waiting to get a new piece of consumer electronics (guess who is advocating waiting, and who instant gratification). So good point, even in a deflationary environment economic activity will still go on, as people need or "need" things today and will buy them even if it will be cheaper tomorrow.

 

[teejayevans]

In a sense, we have rampant deflation in computers and electronics, apart from hedonic adjustments. I haven't purchased an iPod because I know it will be a lot cheaper in the futre, but that hasn't stopped a lot of others.

Well I bought it 4 years ago, for about $350, since then I've averaged
about 1 hr/day of use, that's about 25 cents per hour, well worth it.
Now I can buy it for $250, big deal, a $100, I could have saved a
lousy $100 ?!? if I waited 4 years...glad I didn't wait.
Is everything about money?? Not for me it isn't.
TJ

 

[ESRBob]

TJ,
If only my kids could buy and use a piece of consumer electronics for 4 years... Mostly they seem to feel the need for an upgrade every 12-18 months. Thus the 'discussions'. I too am on a 4 year cycle, generally starting a year or two after something gets introduced, just to let some others catch the arrows and work out the kinks (and sometimes catch it after the first price drop/feature improvement).

 

[bpp3]

So good point, even in a deflationary environment economic activity will still go on, as people need or "need" things today and will buy them even if it will be cheaper tomorrow.

Having lived in a deflationary economy for some years, it is true that people still buy stuff even if the price is expected to go down. From what I can see, people don't stop buying because prices are going down, rather prices go down because a certain amount of buying has been curtailed for some other reason, like employment uncertainty. That is the un-fun part of deflation. Then wages get cut (employers have more pricing power when job security declines), which makes people feel poorer, even if their net purchasing power has actually gone up because goods got even cheaper, so they buy less. Rinse, repeat.

As for banks offering negative interest, not literally, but they get close enough to zero not to make a difference. Then they try to nickle-and-dime you on fees, so that it does effectively cost you money to keep it at the bank.

But anyway, I do not think deflation causes economic bad times, but is more likely a symptom of them. (But what do I know.)