Investments, savings and all other dollar indicators need inflation adjustments

Over the nearly five-year Covid period (2020 to date), consumer price inflation has stood at 22%. Such a high price increase led to a decrease in the purchasing power of the US dollar to $0.81. So an after-tax profit margin of 22% was needed just to break even.

And 22% over five years means 4.1% per year. (If such income is subject to tax, the rate is higher. For example, a tax rate of 25% means that the required income is 5.5%). And remember, this is just breaking even – in other words, 0% real come back. So what did savers and reliable investors do? Badly. Here’s how you could invest in 1-month US Treasury bills.

So, the loss of purchasing power when investing 100% at the market rate (determined by the Federal Reserve). There is no net income there. Instead, new savings are needed to compensate for the lost real value.

For more information, see “How to correct the Fed’s mistakes regarding the terms of the last three chairmen»

What about stocks?

We’ve been reading about new highs for a while now, so growth must be strong, right? Well, they are not as good as the media reports. This 22% inflation (19% lost purchasing power) must be compensated. And since inflation is a factor, we can’t just subtract it. Moreover, since stocks are volatile, simply examining the adjusted endpoint does not provide sufficient information.

So here are the comparison charts.

First, the nominal (as reported) results

Good returns, but what about inflation?

Next, let’s add inflation.

So there is a CPI line that continues to undermine what is stated above. But inflation is a compounding factor, so we can’t simply subtract the numbers given.

Now to the “real” (inflation-adjusted) results.

Okay, there are adjusted highs. However, note that the new highs came later. Moreover, they are nowhere near as high as the nominal figures. But now they are real.

Bottom line: Adjust all currency comparisons.

Inflation, especially during higher than normal periods, should be excluded from all dollar comparisons. Earnings, home prices, IRA balances, tuition, minimum wage, prices for eating out, gas, dentists and vets, cat food, hairdressers, etc. Why adjust all the prices? Because if you exclude general inflation, it is likely that most current prices simply reflect what is happening elsewhere.