How Inflation Ate Your Grandparents’ Money
A boy asks his grandmother about rising prices
Grandmother: “When I was a kid, you could go to the grocery with a dollar and come home with enough food to feed your family for weeks!”
Boy: “Well, Grandma, we recently learned about it at school, and that’s called inflation.”
The word “inflation” comes from the Latin word inflare, which means “to puff up” or “to inflate”. There is a Classic Quip” “By the time you can finally make ends meet, inflation moves the ends.”. Inflation is something you can’t escape. We bring inflation when we are born and have already given it enough raise by the time we die.
The Consumer Price Index (CPI) measures inflation in the US. You can refer to the Bureau of Labor Statistics for a comprehensive understanding of the CPI. The CPI is not a direct dollar amount but a relative measure of price changes. It is divided into two categories: Core CPI and Non-core CPI.
Core CPI excludes food and energy prices, providing a more stable perspective on underlying inflation trends. This exclusion is important because food and energy prices are highly volatile and can distort the overall inflation figure. Conversely, Non-core CPI includes the prices of all consumer goods and services, capturing complete price changes, including those from the more volatile sectors.
Over the years, US inflation has averaged between 3% and 4%. The 1970s and 1980s experienced particularly high inflation, with rates reaching double digits. Significant events that contributed to this high inflation included the Arab oil embargo in 1973, which caused crude oil prices to quadruple, along with the Federal Reserve’s ineffective monetary policies. Here is a list of the years with the highest inflation rates in U.S. history.
Inflation leads to a decrease in purchasing power, meaning the value of money diminishes over time. For instance, $100 in 1957 could buy significantly more than the same amount in 2025 due to the cumulative effects of inflation. If $100 could cover a week’s worth of groceries in 1980, it might only buy a few days’ worth of groceries in 2025. This illustrates the direct impact of decreasing purchasing power. The Bureau of Labor Statistics monitors these changes through the Consumer Price Index (CPI), which quantifies how much the value of a dollar has diminished over time.
The Golden Era of Savings: Your Grandparents’ Financial World
The post-war economy was a time of great growth and wealth. It shaped how your grandparents saved money. Back then, saving was seen as very important. People saved for the future, knowing that a dollar in 1950 was worth a lot. They preferred to keep their money in savings accounts. This gave them a sense of safety and stability. Over the years, savings account interest rates have dropped, while inflation has risen.
This combo has cut down the buying power of your savings. It’s crucial to find new ways to save. To protect our wealth, we should diversify our investments and manage risks. Keeping up with market trends is also important. Exploring different investment options, like real estate or index funds, can help fight inflation. A proactive approach to managing our wealth helps us avoid financial mistakes and secure our future.
As always, I aim to support my article with data. Please download the Excel sheet that provides a year-by-year analysis of the erosion of $100 from 1957 to 2024. The Excel sheet also includes the Consumer Price Index (CPI) for each year, along with the percentage rate of change for each year.
The CPI numbers in the Excel sheet are sourced from the Federal Reserve Economic Data (FRED) database. FRED is a collection of economic data time series gathered from various sources, maintained by the Research Department of the Federal Reserve Bank of St. Louis. The data is available from 1957 onward. While it can be downloaded in Excel format directly from the website, I obtained it through the programming language R which I am well versed with.
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From $20 to $220: The Great American Dollar Disappearing Act was originally published in The Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.
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