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MAKING MONEY WORK

Inflation—The Silent Thief

By Bill G. Page
Author

CBN.com – Webster’s dictionary describes inflation as “an increase in the volume of money and credit relative to available goods resulting in a substantial and continuing rise in the general price level.” In other words, inflation can negatively affect your purchasing power. The following chart shows some recent annual rates of inflation:

Year	Annual Infaltion Rate (1)
2005	3.39%
2004	2.68%
2003	2.27%
2002	1.59%

If the economy is growing too rapidly, orders for the manufacturer may exceed the traditional levels a normal supplier can maintain. The manufacturer then goes to outside suppliers for additional raw materials. As a result, the suppliers recognize the higher demand, and price discounts are no longer offered, which increases the manufacturer’s production cost, which increases the consumer’s purchase price.

For example, let’s say you have $1.00 saved this year. A manufacturer has been producing a product you have been purchasing for $1.00 at the grocery store. During the course of the coming year, the manufacturer experiences production cost increases and passes those increases along to you, the consumer. The next time you go to the grocery store, the same $1.00 item now costs you $1.03. Because of inflation, the item costs 3 percent more than it did a year ago.

If you have not invested your money, making at or more than the rate of inflation, your purchasing power has actually declined because your $1.00 from last year will now only pay for 97 percent of the item’s new cost. The real purchasing power value of your $1.00 has been diminished. Inflation can be described as an invisible thief—over time, it can erode the purchasing power of your money.

Read the parable of the talents told by Jesus in Matthew 25:14–30. The master had some harsh words for the servant who buried his one bag of gold in the ground. He called him lazy and a rascal. He told the servant that he should have put his money on deposit so it would have earned interest. The master had the bag of gold taken from the servant and then had the “useless” servant thrown into the dark.

The parable relays some important modern day financial principles. Do not keep money at home, in a mattress, in a sock, or in a can buried in the yard. Most homeowner’s policies only cover a few hundred dollars in cash. The federal government insures bank accounts up to $100,000. It is safer to keep your money invested as opposed to keeping it at home. Invest your money so it is earning interest.

The servant had “saved” his Master’s money by burying the one bag of gold in the ground; however, he had not invested it. A critical difference between saving and investing is recognizing the impact inflation can have on your investments.

Using our $1.00 grocery store item example, let’s say you have saved $1.00. You put the money into your bank checking account making 1percent interest. Next year you now have $1.01. Now let’s assume that inflation was 3 percentfor the year. The cost of the item is now $1.03. Your investment is $0.02 less than the new purchase price. Your buying power has actually diminished.

The difference between saving and investing then is purchasing power. Your earnings over time need to consistently exceed the rate of inflation, or like the servant in the parable, what you have will be taken away from you in the form of diminished purchasing power.

(1) Source: www.InflationData.com, Current Inflation Rate table.