Inflation and Stagflation

Inflation and stagflation were significantly damaging to the economy and to money’s purchasing power from 1970 to 1982.

The early 70s’ saw high inflation. During the late 70s to the early 1980s the nation experienced stagflation.

Stagflation is raising inflation, stagnant business growth and increasing unemployment. It was a tough time for many people and businesses.

The Viet Nam war, the war on poverty and the other programs of the Great Society started in the 1960s caused increased government spending.

The 1970’s and early 1980s saw inflation and stagflation (which were a probable result of this excessive spending).


Data from InflationData.com_Historical Inflation

Per the chart shown above it is staggering to see that the purchasing power of $100 in 1969 was only worth $38.00 in 1982. There is a significant possibility that this type of inflation (if not worse) could happen again in the relatively near future.

From 1983 until now, inflation has averaged in the neighborhood of 3%. Although this erosion of the dollar may acceptable to some, consider that the U.S. money supply has grown much more than the inflation rate since then.

The MI money supply (Currency, traveler’s checks, demand deposits and other check-able deposits) has increased from Jan 1983 to December 2011 from $477 to $2158 billion. This is a 450% increase in 28 years.

Per the Rule of 72, if inflation had kept pace, it would have increased an average of 5% per year. This pressure encourages further erosion of the purchasing power of the dollar (inflation).

A Word of Caution – Inflation and Stagflation
Many financial planners will calculate retirement income out for 30 years using an inflation rate of 2.5 -3.5%. Although in the past 30 years that has been a relatively accurate inflation rate, it is by no means a prediction of the future.

With the massive printing of US fiat currency and the subsequent debasing of the dollar, the potential is high for another round of inflation, or hyperinflation in the not too distant future.

In other words, carefully check your premises when doing long term financial planning. Assumptions are critical in decision making. They will affect the outcomes dramatically.

For more inflation information see: Historical Inflation

Return from Inflation and Stagflation to Bad Monetary Policy