The Insidious Effects of Inflation

The Insidious Effects of Inflation

While watching Antiques Roadshow last night (I know… exciting life, right?) I saw a great example of the insidious effects of inflation. The show featured a guy who had brought in a huge (and rather ugly) “slit drum” from Papua New Guinea for an appraisal. If you’re not sure what I’m talking about, it’s basically a big, hollowed out log sitting on a couple of smaller logs.

Anyway, he had apparently bought the drum in 1976 and got what he thought was a steal of a deal… $3k, marked down from the original price of $6k because the shop was going out of business. He’d had his eye on it for awhile and decided to swoop in and buy it during the going-out-of-business sale.

So after talking to the appraiser, what did he learn? His drum was worth $3k-$5k now. Not too bad, right? It held it’s value, and maybe even increased a little bit. But did it really?

This particular show was recorded in 2010, so I fired up my favorite online inflation calculator and punched in the relevant numbers. And guess what? His $3k investment didn’t really turn out that well. As it turns out, $3k in 1976 would have been worth $11, 359.95 in 2010.

Now sure, his drum could’ve (according to the appraiser) been worth 10x more if it had been from the 19th (instead of 20th) century and had been in better condition. And sure, he got to enjoy it over the years (if it’s possible to enjoy an enormous, hollow log), but the larger point still stands…

While inflation is often almost invisible from one year to the next, it really adds up when considered over longer periods of time. In the 34 years under consideration, the value of a dollar fell to roughly 1/4 of its original value. Yikes!

7 Responses to “The Insidious Effects of Inflation”

  1. Anonymous

    While I do agree that inflation does terrible things to the value of our money, it is really inaccurate the way you portray it in this article. “His $3k investment … in 1976 would have been worth $11,359.95 in 2010.” If this were true than in theory I could find $3K that had been shoved under a mattress in 1976 and go out and buy $11K worth of stuff with it today. But we know that isn’t true, I can only go out and by $3K worth of stuff with it today even though the money is from 1976.

    I get what you are trying to say, that had he taken $3K and put it in an investment that matched the rate of inflation, today he would have $11K so that is really the opportunity cost of having had the drum for 24 years, but the way you say it is very misleading to sensationalize the article.

    Is it honestly even fair to consider a drum an investment? To me its more like a couch, you buy it to serve some purpose in your life (be it sitting or in this case drumming/decoration) and if it has some residual value when you are done with it, awesome, if not you still got your moneys worth because it did what you bought it for for 24 years in this case.

  2. Anonymous

    50 years ago a burger and a shake cost 30 cents. Try McDonalds nowadays, and that’ll be $6. If inflation keeps on going like this, the dollar will be worthless pretty soon (keep in mind how much money the Federal Reserve is printing).

  3. Anonymous

    Interesting insight. I like to unload my yard sale items today at 1/4 or less of what I paid for them (which makes my wife cringe), but why store them for years only to find they have become worthless. I am in the process of refininacing my home at 2.75% for 15 years, and I think of this is as move that could pay off in the years to come. It wasn’t too long ago that long-term CDs were earning more than that. If inflation sets in and higher savings rate return in the years to come, I could conceivably earn more on a CD than I’m paying in interest on my mortgage, so I could stop paying extra toward the principal and just save the money–I can always use it to pay down on the mortgage later. Who knows what the future will hold…

  4. Anonymous

    You are so right about the time bomb. In the seventies (for those of us old enough to remember this) inflation was real, high and impacted every life.

    As with all things, some people manage better than others. We can’t control what happens, but we can find ways to cope. Some investments are more inflation proof than others, and some pastimes/occupations are more tolerant of inflation than others.

    And we might very well be looking at another period of high inflation. All the quantitative easing (I wish I could come up with creative names like these) aimed at preventing deflation could just as suddenly turn on a dime and fuel sky high inflation. This is uncharted territory, but an ounce of preparation might yield a pound of protection…

  5. Anonymous

    Ah yes, inflation. The easiest tax of all to implement.

    I’ve found that it works great for “getting one by” on folks who can’t do math, and don’t know any better.

  6. Anonymous

    Sometimes it’s not so invisible, too. The power company here just sent out a notice saying it intends to raise our bills by 4.3%.

    Funny. I haven’t gotten a 4.3% raise in Social Security.

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