Inflation Rate Is False Data

  • June 6, 2024
  • 5 min read

Understanding Inflation and Its Impact
Everybody knows about the fact that there’s inflation happening and it’s affecting prices. It’s affecting your cost of things like gas and groceries and insurance and apartments. Many times there’s debates, even among politicians, about the inflation rate. Is it going up? Is it going down? A lot of people think if the inflation rate goes down, then prices will come down. But we’re going to clear up a big misconception about inflation that maybe more people need to know about.

The Misconception About Inflation Rates and Prices
If you think inflation is going to go down and your prices will go down, and you’re planning for that, it could really mess up your budget. There’s a big difference between the inflation rate and the inflated price. Inflation rate and inflated price are two different things. So let’s take a look at an example.

Example of Inflation Over Four Years
We’re going to talk about a 4-year period of time where something at the beginning of that four years started out at $100 in cost. If the inflation rate was 3% at the end of that year, that item is going to cost $103. See, that’s what the inflation rate is; it’s how much percentage that item increases over the course of a year. So 3% of 100 is $3; at the end of the year, it’s $103, right?

How Inflation Compounds
So let’s say the next year, year two, the inflation rate is 4%. That means at the end of that year, the item is $107 because you’re adding 4% on top of 103. So now you’re at the end of the second year. Let’s say the third year the inflation rate goes up to 8%. Well, now that item at the end of that third year is $116. It went from $100 to $116 in just 3 years.

Clarifying Inflation Rate Reduction
You might say, well, if the inflation rate goes back down, is the price going to go back down? What if it goes down to 2%? Well, the item is still going to go up in value because you’re still adding another 2% on top of the old price. So it was $116 at the end of the 8% year. Starting out at $116, you’re adding another 2%. Why is that? The inflation rate went down; it’s a quarter of what it was. The price still went up.

Inflation is Cumulative
Inflation is cumulative; it adds up over time. So if that inflation happened in the past, it stays there. The price stays there until the rate goes below zero. What would have to happen for that item to go back to $100? You’d have to have a negative inflation rate. Let’s try 14% and see what happens. -14%. There you go. So, year four, you’d have to have a negative 14% inflation for the price to go down to $99, which is never going to happen. You’re never going to have a negative inflation rate.

Understanding Lower Inflation Rates
When you hear politicians or business people, whoever, say the rate of inflation went down, inflation is going down, that does not mean prices are going down. It means that how fast it’s going up is slower. So let’s go back to the 2% model here, right? If inflation was 3%, then 4%, then 8%, inflation is going up 3, 4, 8, and then it goes down to 2%. The price is still higher.

The Ratchet Effect of Inflation
That person who’s telling this story could say the inflation rate is lower than it was four years ago. The inflation rate is 2%. It’s lower than it was in year one of 3%. You’re right, the inflation rate is lower, but the price is still higher. It’s like a ratchet; it locks in that higher price, which is why your gas, your groceries, your insurance, everything is not going to go back down unless some magical thing happens where inflation goes to negative.

Permanent Price Increases
That is a mathematical description of how inflation works and how the price increase is permanent. Inflation can fluctuate, but the price increase stays permanent. The new price is not going to go back down unless inflation goes negative, which it never does. That’s called a depression.

Calculating the Impact of Inflation
You can figure this out for yourself. Anytime you hear what the inflation rate is, 2%, 5%, 10%, 15%, whatever it is, take that percentage and add it to the price of the item. So if you have something that costs $500 and it went up 10%, 10% is $50. 10% of $500 is $50. You add that on; that’s your new price. If the inflation rate next year goes down to 5%, the price isn’t going down 5%. It just means it’s only going to go up 5% versus 10.

Real-World Example
Let’s take a look at a very extreme scenario. Let’s say that your grocery bill is $300 for a week and inflation, we’ve had a couple of 8% years. You started out at 300 bucks, and you had a 3%, an 8%, a 9%, and a 9% over four years. Your new bill is now 400 bucks. I’m sure some of you have seen even higher than that.

Final Thoughts
Don’t be fooled by the inflation rate going down. That has nothing to do with the price going down. Two different things. I know you have thoughts on this and opinions. Put them in the comments below. Let us know what you think.

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