Buying power

Last night I was watching I Love Lucy, an old favorite of mine, with my daughter. When Lucy was given $500 to spend on furniture, she ended up spending over $3000. My daughter could not understand the shocked gasps from Ricky or the laughs and hoots from the audience, as she said those sound like reasonable amounts of money to spend. That led to me looking up the inflation of the dollar from 1955, when the episode was filmed, to today's value. A $500 purchase in 1955 would cost almost $5200 today and Lucy's $3000 splurge would set you back more than $31,000 (an increase of over 937%). That earned the same gasp from my daughter that Lucy's purchase earned from Ricky (we won't even get into Fred's response to that much money being spent).

Buying power through time

We all know how impactful inflation can be. Just look back to some of these averages:

• 1950: The median cost of a house was $7,400. In the US today, the median cost is $374,900.

• 1960: The average cost of a gallon milk was 31 cents, while today's average cost is $3.03.

• 1970: The average cost of a new car was approximately $3,542, compared to today's average cost of $42,258.

Overall, buying power has gone down significantly: if you had $100 in 1960, it would be worth only $11.24 today. 

In November of 2021, inflation rose at a rate of 9.6%, breaking the annual record. The central bank has now said it expects to increase interest rates three times during the current year and core inflation is expected to be at 2.7%. To illustrate what this means, if we had an interest rate of 2% every year for twenty years, at the end of that time, $1,000,000 would have the buying power of $672,971. Ouch! 

What’s happening now?

While we want to be optimistic for 2022, we also need to be prepared for what could be rough waters ahead. If you want to see your money grow, rather than shrink, and in order to combat a lower purchasing power, you will want to have a sophisticated retirement investment strategy in place. That is where we can help. Whether you attend one of our courses or come in for a planning strategy session, our experts at Pacific Financial Advisors are here to help you increase your savings during these uncertain times and to ensure that if you do hear about an unexpected expense, like a houseful of furniture, your response is not like Fred Mertz's and does not include falling back into a dead faint.