The nearly 5-year Covid-period (2020-current) has experienced a 22% consumer price inflation. That high price rise dragged the U.S. dollar’s purchasing power down to $0.81. So, an after-tax return of 22% was needed simply to break even.
And 22% over five years means 4.1% per year. (If such earnings are taxable, the rate is higher. For example, a 25% tax rate means the needed return is 5.5%.) And remember, that is just to break even – in other words a 0% real return. So, how did savers and safe investors do? Poorly. Here’s how investing in 1-month U.S. Treasury bills would have done.
So, a loss of purchasing power with 100% invested in the market rate (as determined by the Federal Reserve). No net income there. Instead, new savings are needed to offset the lost real value.
For more information, see “How To Fix The Fed’s Missteps Over The Past Three Chairs’ Terms”
What about stocks?
We have been reading about new highs for a some time now, so the gains must be high, right? Well, they are not as good as the media has been reporting. That 22% inflation (19% lost purchasing power) needs to be compensated for. And because inflation is a compounding factor, we cannot simply subtract it. Moreover, because stocks are volatile, simply examining an adjusted end point does not provide enough information.
Here, then, are comparison graphs.
First, the nominal (as reported) results
Nice gains, but what about inflation?
Next, add in inflation
So, there is that CPI line that keeps undercutting what is above. But inflation is a compounding factor, so we cannot just subtract the numbers shown.
Now to the “real” (inflation-adjusted) results
Okay, there are the adjusted highs. Notice, though, that new highs came later. Also, they are not nearly as high as the nominal figures. But now they are real.
The bottom line – Adjust all currency comparisons
Inflation, especially during a higher-than-normal period, should be removed from all dollar comparisons. Earnings, house prices, IRA balances, tuition, minimum wages, dining out prices, gasoline, dentists and vets, cat food, hair stylists, etc. Why adjust all the prices? Because taking out the overall inflation will likely show most current prices simply mirror what is happening everywhere.