Thanks to a great article by Jeff Sommer in the May 5 Union-Tribune entitled, "What's a dollar worth these days?" I got to thinking about inflation and how it impacts buying power. Yes, we have seen our grocery bills go up 20+ percent (according to some accounts) in the past 3 years and we know everything is more expensive but what does that mean in real terms?
Per Sommer's article, he looked at the government's Consumer Inflation Index calculator and ran some numbers. A March 2021 dollar is worth less than 85 cents today. What???? He also noted he has been working full time since 1977 and the calculator says that every dollar he earned in his first job is worth only 19 cents in 2024 money. Dang.
The term "money illusion" that I used in the teaser for this article comes from a 1997 paper and it basically (thank you for the clear definition Investopedia) is an economic theory positing that people have a tendency to view their wealth and income in nominal dollar terms, rather than in real terms. In other words, it is assumed that people do not take into account the level of inflation in an economy, wrongly believing that a dollar is worth the same as it was the prior year. Further, money illusion also is when in periods of high inflation, employers can get away with giving raises that actually are wage cuts if you figure in inflation. Say you get a 3 percent raise and inflation is currently at 4 percent than in reality you have taken a 1 percent pay cut. I am sharing all this because lots of industries don't share their numbers on an adjusted basis taking inflation into account. It gets kind of slippery if you try to hold on to this concept but we all should understand it is out there. Housing prices have stayed level or are up slightly but not as much as you would think if you figure in inflation. It is a great deal to think about but this is the stuff that I ponder. If you ever want to talk economics (or housing!) give me a call.