By Dan Martin
December 21, 2016
There are a bevy of great quotes about inflation, but if I had to choose a favorite, it would be from Sam Ewing, author of Professional Filmmaking: "Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair."1
Whether you know it or not, you likely think about inflation every day. For example, around Christmas-time when money can get tight, you may wonder why it seems like your annual egg nog purchase cuts into your budget just a little bit more than the year before. So what is inflation, really?
Inflation can be defined as the rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. In other words, as inflation rises, every dollar will buy a smaller percentage of a good. To use a basic example, if the inflation rate is 2 percent, then a $1 pack of gum will cost $1.02 in a year.2
Now, let's apply that concept to the inflation rate in the U.S. over the past 100 years (1915-2015) to get an idea of the impact on spending power. Imagine you're a dapper young gent strolling the streets of Cincinnati, Ohio in 1915, and you stop to pick up a moderately-priced pair of men's dress shoes. In those days, your wallet would have taken a hit of $3-$5.3 As of January 2015, the value of that $3-$5 has inflated to between $70 and $116.
You can imagine, then, how this could potentially have a profound impact on the value of savings accrued and maintained over a lifetime.
Thus, it is important that investors learn at least the most basic concepts surrounding inflation, and how it can potentially impact their money in the future.
One of the best ways to understand the inflation rate is through examples, so in the spirit of the season, let's take a look at a few of our favorite holiday icons through the lens of RetireMath®:
Santa Claus and the Increasing Cost of Bringing Holiday Cheer...
While Santa Claus is presumably still coming to town these days, inflation over the past 60 years has likely made it more difficult for Saint Nick to balance his checkbook.
The following calculations can be helpful in understanding inflation, as the results show the increasing impact of the erosion of purchasing power over time.
Because those of us in the financial services industry love acronyms more than most things, let's take a look at how inflation has affected Santa's CHC (Cost of Holiday Cheer):
Gassing Up the 'Ol Sleigh
As we all know, on December 24 every year, Santa, Rudolph and friends begin their trip around the world, but for the purpose of this article, let's focus on the U.S. leg of his trip.
The U.S. is about 3,300 miles across, from Maine to Los Angeles. For the sake of argument, let's say that Santa just needs to head in a straight line across the country, and that the sleigh gets an average of 20 miles per gallon on a 16-gallon tank.
Doing the basic math here (MPG X Tank Size), Santa could cruise about 320 miles on a single tank. If he was going all the way across the country, that would mean he would have to stop for gas about 10 times (Miles Across U.S. Divided By Miles Completed on a Single Tank).
In 1950, at an average cost of .18 cents per gallon,4 the full trip would cost Santa $28.80 (.18 (Cost Per Gallon) X 16 (Tank Size) X 10 (Times Santa Fills Up). Not a huge hit to the pocketbook for hitting the entire country.
Fast forward to 2015, where gas prices in the U.S. sit at an average of $2.15 per gallon (as of November 17, 2016).5 Using the same calculations, today, Santa would be on the hook for $344.00 – that's an increase of 1,094 percent! At this rate, he may be thinking about investing in a Smart Sleigh or something a little bit smaller to counteract the gas bills.
OK, obviously this is assuming that the reindeer are just for decoration, or that the sleigh is some sort of reindeer-gas hybrid, but just don't think too hard about it. The point being, of course, that inflation is what has driven this significant discrepancy over time.
Sticker Shock in the Toy Aisle
If you are a hard-line Saint Nick traditionalist, you would say that Santa and his hard-working elves make every toy that appears under the tree on December 25. While we may never know the answer to this riddle, other enthusiasts believe that, like everyone else, Santa sometimes has to hit the toy store at the last minute.
To make sure we are working with an apples-to-apples comparison, this calculation will use a toy that's been around since the 1950s.
I won't mention his name, but he has served as everyone's favorite plastic starch who wears glasses for more than 60 years. In 1950, this toy would have cost Santa only $1.004, while today's version fetches $7.99.6
Assuming that every child in the U.S. wants this toy (who wouldn't?), and Santa's workshop is running low on plastics, the big guy would have needed to purchase 47.3 million in 1950 and 74 million in 2015 (according to U.S. Census Bureau projections).7
Thus, while Santa would have paid $47.3 million for these toys in 1950, he would have to drop $591 million in 2015 (a 1,150 percent increase).
That's a lot of green for the man in red, and it could be the reason he's still working instead of taking a well-deserved retirement package.
The Tooth Fairy Is Going to Have to Get a Second Job...
The amount of money one gets from the Tooth Fairy is a defining example of the "exagg-inflation" (see what I did there?) stories that parents like to tell their kids. For example, to paraphrase my dad: "You got a whole quarter? Heck, when I was your age and lost a tooth, the Tooth Fairy would punch me in the face while I was asleep and tell me to toughen up."
However, according to a recent study from VISA, there is actually some truth to these stories. In 2015, the Tooth Fairy is apparently leaving, on average, $3.19 to U.S. children.8 Not only does this make my dad semi-right (which, as you know, can be difficult to stomach), it is also a great indicator of inflation in the country. For example, the $3.19 number represents an astronomical increase of 6,280 percent over the 1950s (kids those days received a nickel for each lost tooth).9
For those of you who are "RetireMathing" at home, to calculate percent change, you can always use the following equation. This is the equation I use the most for personal finance or other daily tasks — it's very useful: (new number – old number)/old number X 100. So, to use the example above, the equation would be laid out as follows: [($3.19 - .05)/.05]*100 = 6,280.
Now, this massive shift is not only due to inflation, but the change in the value of money is definitely a big part of it. Hopefully, the size of these increases shows the impact that inflation can have on your savings over time, as the less each dollar is worth, the more money you will need to maintain your lifestyle in retirement.
The Easter Bunny May Need to Switch Commodities...
You probably get the point by now, but I will give you one more stat to help you look like a genius at your next Happy Hour. The Easter Bunny (EB), perhaps the most terrifying of all holiday icons, hides eggs for children to find on the morning of the holiday.
Why eggs? It's actually pretty interesting, but we don't have time to go into it here. Look it up! More important than the history is where he (or she) gets the eggs.
For the sake of this piece, let's say the Easter Bunny gets them by the dozen at the grocery store. In 1956, at a corner store in New Jersey, the EB could grab a dozen large eggs for the low price of 0.79 cents,10 while today, that same dozen eggs would cost $2.89.11
At least in comparison to the other examples, that just doesn't seem like that much inflation over time.
However, one of the things to keep in mind about inflation is how much it can add up, especially with a commodity item like eggs that most individuals or families buy on a weekly or monthly basis.
Put into the context of the Easter Bunny, let's say he or she plans to hide one dozen eggs per child. Using one quarter of the U.S. children numbers listed above (not everyone will be visited by and/or cares about the EB), the EB would need to provide for roughly 18 million children. While the EB would be putting more than $13 million on his credit card in 1950, he would be scraping up more than triple that number ($52,020,000) in 2015.
You get the idea – with a little basic math, you can set up and calculate these equations for almost any type of product or service that has been around a while, and it may help put the impact of inflation in perspective.
They May Be Mythical Creatures, But Inflation is Real...
[SPOILER ALERT: Don't let your unusually financially savvy children read this part.]
Now, of course none of these characters are real things. I would hazard a guess that, if an actual six-foot bunny rabbit carrying a knapsack full of giant eggs came to your door, the cops would be getting a phone call.
That being said, it doesn't really matter how you go about learning the ins and outs of inflation, as long as you understand the impact it can have on your financial life. There are products and strategies that are specifically designed to help investors manage inflation, and your advisor can help you understand the pros and cons of each of these in the context of your portfolio and your specific personal situation.
These statistics are not meant to scare you; they are intended to help you approach your retirement savings with as much know-how as possible. Yes, it's a little bit tongue-in-cheek, but if we are able to spread a little holiday cheer along with some delicious roasted chestnuts of financial knowledge, then we have done our job.
We hope you have a joyous and stress-free holiday season, and that we see you back on the Center for Financial Insight soon.
1Ewing, S. (2016). Quotes About Inflation – Sam Ewing. GoodReads. Retrieved from GoodReads.com.
2n.a. (2016). Inflation. Investopedia. Retrieved from Investopedia.com.
3n.a. (January 2, 2015). A Glimpse At Your Expenses 100 Years Ago. U.S. News and World Report - Money. Retrieved from Money.USNews.com.
4n.a. (2016). 1950s News, Events, Popular Culture and Prices. The People History. Retrieved from ThePeopleHistory.com.
5n.a. (November 17, 2016). AAA Daily Fuel Gauge Report. AAA. Retrieved from AAA.com.
6n.a. (2016). Playskool Mr. Potato Head. Amazon. Retrieved from Amazon.com.
7n.a. (2015). Number of Children (In Millions) 0-17, 1950-2014 With 2015 Projections. ChildStats.gov. Retrieved from ChildStats.gov
8n.a. (2015). 2015 VISA Tooth Fairy Survey. VISA – Practical Money Skills for Life. Retrieved from PracticalSkills.com.
9Warner, R. (2016). The History of the Tooth Fairy. Warner Family Dentistry. Retrieved from WarnerFamilyDentistry.com.
10n.a. (2016). Food, Toiletries and Groceries in the 1950s. The People History. Retrieved from ThePeopleHistory.com.
11n.a. (December 10, 2015). Wegman's "Food You Feel Good About" Eggs, Dozen, Large. Wegman's New Jersey. Retrieved from Wegmans.com.