Bit By Bit, Inflation Takes a Crushing Toll

By Carrie Schwab-Pomerantz

By Terry Savage

June 30, 2008 6 min read

Why worry about a little inflation? Because even a little bit adds up over the years and can make a real dent in your wealth — if you haven't prepared with investments that will not only match, but outpace, the ravages of inflation.

Our average historical inflation rate, going back to 1913, is an innocuous looking 3.42 percent a year. But that "tolerable" rate adds up to a total of more than 2,000 percent inflation! Or to put it another way, $1 today is only worth 4.8 cents in 1913 dollars.

What happened to the value of our money? Inflation has eaten away at our buying power. The government took our money by stealth, in small increments, by the secret tax that inflation enacts on all of our savings. The more money they "create," the less valuable our existing money becomes.

The current inflation rate is 4.18 percent, based on the Consumer Price Index figures released in mid-June. That's actually below the nearly 6 percent inflation rate that alarmed President Richard Nixon enough to institute disastrous wage and price controls on Aug. 15, 1971.

Tim McMahon of keeps track of these historical inflation statistics, with an amazing array of online charts and calculators. One calculator lets you figure out the total rate of price inflation between any two dates from 1914 to the present. Perhaps the most useful feature of the site is a retirement inflation calculator. It allows you to calculate the impact of inflation on the spending power of your retirement dollars over the years.

We live in dollars, shop in dollars, invest in dollars and retire in dollars. But we very rarely think about hedging our dollar bets — something the rest of the world is doing in a dramatic way. They'd rather have euros, or gold, or corn and soybeans, than hold on to U.S. dollars.

Foreigners recognize that the United States continues to go into debt, continues to create more "liquidity" and now is penalizing dollar-holders by keeping interest rates low, as the Fed struggles to keep the financial services sector alive and keep the economy from falling deeper into recession.

If you were a foreign central bank, or a producer of a commodity such as oil, wouldn't you be skeptical of the future value of the dollar? Would you continue to hold dollars you collect from selling products, especially at the low interest rates being paid on the dollar? Or would you demand higher prices for your goods, and try to get rid of your dollars as quickly as possible?

That's why the world markets have determined that — given the declining value of the dollar — a barrel of oil should cost more than $60. In fact, to get the world's producers to part with one barrel, we now have to fork over nearly 140 U.S. paper dollars.

We've actually had a relative bargain in oil prices until recently. It wasn't until the average monthly price exceeded $106.43 per barrel, that the inflation-adjusted price of oil in dollars exceeded the comparable average monthly price of $38 per barrel hit in 1979, according to (

Now that the world is on to our game of "creating" more dollars to keep our economy going, combined with the demand for commodities brought on by growing economies in Asia, it's likely that dollar prices of these raw materials will move higher.

And it's less likely that they'll keep lending us back our money at low interest rates to finance our deficits.

Politicians of both parties seem to be hoping that Americans won't catch on to this looming inflation disaster until after the November presidential election. After all, how could they continue to make their promises to "help" us if we knew the real cost?

Could they promise to give checks to worthy recipients from distressed homeowners to disaster-stricken regions? Could they promise loan forgiveness to graduates or rebates to encourage savings? Could they promise tax cuts to various constituents, or subsidies to deserving energy industries?

Could they continue to make all of those promises about spending dollars they don't have — if we all understood the consequences, the reality that the government must either create ("print") that money or borrow it?

The rest of the world is watching this shell game, determined not to be conned — even if American voters are blinded to the true costs of promises being made on both sides of the aisle. The only question is whether American voters will wake up in time to demand real answers to our very real problems. Or whether we'll just continue to inflate them away. And that's The Savage Truth.

Terry Savage is a registered investment adviser and is on the board of the Chicago Mercantile Exchange. She appears weekly on WMAQ-Channel 5's 4:30 p.m. newscast, and can be reached at Her new book, "The Savage Number: How Much Money Do You Make?" has just been published. To find out more about Terry Savage and read her past columns, visit the Creators Syndicate Web page at

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