Dollars and Sense briefing by BCM (Belllwether Capital Management LLC)

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Overview of U.S. inflation
 

Inflation in the U.S. is down from an eye-watering peak rate of 9% in 2022. Some feared the U.S. would experience a return to double-digit inflation, like in the 1980s or 1940s. Yet, even without double-digit rates, the recent spike felt extreme because inflation had been abnormally low since the 1990s.

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It stands to reason that a period of below-average inflation (1990 to 2021) would be followed by a period of above-average inflation (2022 to ?).  Not only because inflation tends to average out over time, but also because the U.S. just experienced a decade of abnormally low interest rates (which is inflationary). 

There are also valid arguments for why inflation may go down, but the reality is nobody really knows what will happen next. Regardless of how high or low inflation is, prices tend to go up over time.  And for most people, higher is more concerning than lower because higher inflation is more damaging to our wealth.

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Why you should care

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Many people may not notice or care about small price changes in the short term. For example, whether a bottle of water costs $1 today and $1.03 or $1.07 next year may not seem important. However, small changes can grow into big problems in the long term.

 
The table below shows how inflation erodes the value of money over time. At 4% inflation per year (the U.S. long-term average), $100 today is only worth $31 after 30 years. In other words, if $100 today could buy 100 bottles of water, that same $100 would only buy 31 bottles after 30 years. That results in a devastating hit to our buying power and real wealth.

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