Global Finance · Chapter 21
Inflation and Purchasing Power
Understanding how rising prices erode your money's value over time and how to protect your wealth from inflation.
What Is Inflation?
Inflation is the rate at which prices for goods and services rise over time, reducing the purchasing power of money. A dollar today buys less than a dollar did ten years ago.
Rule of 70: Divide 70 by the inflation rate to estimate how many years it takes for prices to double. At 3.5% inflation, prices double in roughly 20 years.
Causes of Inflation
| Type | Cause |
|---|
| Demand-pull | Too much money chasing too few goods |
| Cost-push | Rising production costs (wages, energy, materials) |
| Built-in | Wage-price spiral from inflation expectations |
Example: If inflation is 4% annually, $100 today will only have the purchasing power of about $96 next year, and roughly $66 in 10 years.
Protecting Your Money from Inflation
- Invest in stocks — historically outpace inflation long-term
- Real estate — tends to appreciate with inflation
- TIPS (Treasury Inflation-Protected Securities) — adjust with CPI
- Avoid holding excess cash for long periods
Chapter 21 Summary
- Inflation erodes purchasing power over time
- Rule of 70 estimates years to double prices
- Causes: demand-pull, cost-push, built-in expectations
- Stocks, real estate, and TIPS help protect against inflation