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Friday, February 06, 2004
Inflation in compound - and in perspective

The Adam Smith Institute's Eamonn Butler sends out an email on various economic and political stories every fortnight, which you can receive by adding your email address to their list. Of particular interest this time was this, on inflation:

The Value of Nothing

I've always thought that a financial genius must be someone who can make money faster than the government can spend it. But even though they love our money, governments still abuse it. Looking up some inflation stats recently, I discover that a pound of today would have bought:

2x as much in 1983
5x as much in 1975
10x as much in 1968
20x as much in 1949
100x as much in 1727
500x as much in 1500

The top figure, going back to the year I was born, I found the most interesting. True, the Retail Price Index briefly hit double-figures as the 1990s began because Nigel Lawson had defied the Prime Minister to shadow the Deutschemark, which he did by borrowing and printing pounds to be sold for Marks. But that apart, the entire period since 1983 has in all but the most historical sense been one of pleasingly low inflation. Yet still a pound buys today what 50p would have bought then. I understand it was Einstein who said compound interest was among man's greatest inventions. Knowing his own country's history, he might have added that compound inflation is among the worst. All those 3 per cents a year since 1983 add up.

On the other hand, the stock market has on average doubled in value every six years since 1918. Seen from that perspective, the Thatcher and post-Thatcher era of inflation has been rather benevolent towards those thrifty enough to put some money aside. Set that achievement against the record of the last Labour government, during whose term of office prices doubled in just five years, and you see how far we've come.

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