this post was submitted on 26 Jan 2024
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Felt like nerding out on this.
You can use the rule of 72 to figure compounding inflation (or interest) in your head. Just take 72 divided by your inflation rate and you get how long it takes for a price to double. Example: Assuming 3% yearly inflation , It would take 72/3 or 24 years for the price to double. Then, just double the starting price for each 24 year period. So assuming a car was 1,000 in 1950, it would cost about 2,000 in 1975, 4,000 in 2000, and 8,000 in 2025 if inflation for that product was exactly 3% yearly.
A couple percentage points difference makes a huge difference in how long it takes for a price (or investment to grow). The stock market has an average yearly interest rate of like 8%. That translates into a investment portfolio doubling every 9 years instead of the 24 years it would be for 3%. So 45 years in the market would turn an initial 1k investment into a ~$32k investment.
Of course, you could also use an online compound interest calculator(simple one here), but I like to know how to do the calculation myself personally.
But then you get greedflation periods (maybe never before like the past four years?) where you see some brands raising their car prices 50% since 2020 (inflation over that period an already high 21%).
Yep it doesn't stay at the same rate. Best you can do is base it on the average. 3-4% is probably the most realistic average to go with for a rule of thumb.
What's the explanation for the 72 magic number?
Maths :). I don't know well enough to explain but my good friend wikipedia has an explanation.
Yeah, that tracks with my experience, but I didn't realize there was a reasonable easy to remember rule of thumb. I figured out last year that the value of the dollar had reached 50% of what it was when I started working. That was 25 years at the time.
That realization really helped me re-ground my price expectations.