Friday, June 04, 2010

Hard Core Inflation

Just doing a little back of the envelope calculation for the inflation rate on my grocery bill.

I know that 9 years ago, my average grocery bill was $75 a week.

Over the last 3 months, my average grocery bill has been $175 a week.

According to my calculations, that's an increase of 233% over the past 9 years, or roughly 25% inflation per year.

Because the price of a pound of peaches varies from season to season, food costs are too volatile to be included in core inflation rate calculations. Because I can now buy a computer with 233% more processing power for 50% less than it would have cost me in 2001, somehow everything balances out. 

If the inflation of the average grocery bill (not individual food costs) were included in the core inflation rate, there would be panic in Washington and New York. Regimes would fall. Banks would collapse. That's why when they talk about the economy, they brush the ugliest numbers under the carpet. Those numbers are too volatile.

Hell yes they're too volatile. They keep going up! At 25% a year!

1 comment:

greg said...

interesting post, but your math is wrong. that works out to be a 9.87 percent annual interest rate. in case you don't believe it, here is the math: a 25% annual interest rate; (((((((((75X1.25)1.25)1.25)1.25)1.25)1.25)1.25)1.25)1.25)=$558.79
a 9.87% annual interest rate; (((((((((75X1.0987)1.0987)1.0987)1.0987)1.0987)1.0987)1.0987)1.0987)1.0987)=$174.97

another way to figure this out is: annual interest rate(i) is equal to the final value (fv) divided by the initial value (pv) to the power of 1 over the number of years (n) and then subtract one from that total.

i=((fv/pv)^(1/n))-1

http://en.wikipedia.org/wiki/Compound_interest#Mathematics_of_interest_rates

cheers