Sunday, August 19, 2018

Calculating Inflation with a Practical Example

Everyone needs to know how to calculate inflation.  Here is how, with a practical example.  I have an old copy of Glory Road by Robert Heinlein from 1963 priced at $1.75.  Wow!  Today that book sells for $16.99.  To calculate the inflation that drives a book from $1.75 to $17 dollars we set up this equation after calculating (2018 - 1963) = 55:
1.75 ( 1 + x)**55 = 17.0
To solve with python, you first do "import math" into the IDLE GUI.

>>> import math
Here is the solution to the equation.  We all remember algebra, right?
>>> 10.0 ** ( math.log10(17.0 / 1.75) / 55.0)
So 1.0422 is 1 + x, meaning the inflation rate for this book is 4.22% over 55 years.
The average inflation rate is presumed to be 3% as I stated in "Teaching Our Children About Investments" (July 29, 2018), but it is 4% for this book.

Going from $1.75 to $17 is about a 10 fold increase.  I saw this in my lifetime.  I was buying stuff in 1963.  You have to teach your kids that everything they buy today will cost at least ten times more when they are older.  You have to teach them that inflation is a threat to them and their future.  Think about it.  If you have a big basket of groceries and you pay $200.00, like I have done, that same basket of groceries will cost your children $2,000.00 in their lifetime.  It might be 50 years later, but  it is coming like the sunrise if we cannot cannot drop inflation back to about one percent.

Inflation is a hidden tax imposed on us by our own government.  Milton Friedman said in "Money Mischief: Episodes in Monetary History," that, “Inflation is always and everywhere a monetary phenomenon.”  That is a fancy way of saying the government does it to us because it sets monetary policy and controls the money supply.

We all should be getting after our elected officials about inflation and deficit spending.  The mass media, like television news, distracts us away from what is important to us with what I would call "circus sideshows."  They have been running an anti-Trump circus sideshow for about two years now.  They have lost their minds.  Our TV news media are much like Emperor Nero fiddling while Rome burned.

We need to stay focused on what is important to our families and our future.  We should be talking more about inflation among us parents and with our children.
Look at the huge difference between 4% and 2% inflation over our adult life time, which I will call 60 years, which is age 25 to age 85.  (Below is a cut and paste from the Python IDLE GUI)
>>> 1.04 ** 60
>>> 1.02 ** 60
This shows prices going up by a factor of 10 with 4% inflation.  That is horrible.  Going up by a factor of 3 is more manageable, which is with a 2% inflation rate.  If we know a bad storm is coming, most people take prudent action.  You either prepare your house to withstand the storm or you evacuate if the storm is too dangerous.  Sometimes people ignore a coming storm and they die.  The future can be dangerous.  Just because the dangers of inflation are in the future is no reason to ignore the dangers.


PS: I use the Python IDLE GUI as calculator.  You type in an equation and hit the carriage return and you get the answer.  You can install Python by using Google and following instructions.  But that does not give you a useful shortcut on your computer desktop for IDLE.   Here is an article I wrote on how to create a shortcut for IDLE:
An IDLE Shortcut After Installing Python  June 30, 2018

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