Earnings and Inflation
A senior maths class I taught recently were looking at Inflation and how this factor affects compound interest. For example, you might invest $100 dollars at 10% compounding interest over 10 years. How much would your total be? Now, you might expect a healthy profit but your new found wealth might be severely influenced by inflation. Inflation has the effect of reducing the spending power of your dollar. To illustrate this, we were looking at a video today that was taken in a Starbucks in Oregon, USA in 2002. The price of a coffee of the day was quite a bit less than it is today. But, of course, the American dollar is worth less now (2012) than it was ten years ago.
Rick (from New Zealand) put it this way, “I just wanted to discuss inflation which has been running at around 5% for the last 5 years. So crunching the numbers.If you bought a $500,000 house in late 2007 you would have to sell it today for $560,000 in order to break EVEN.”
It seems, then, as if there might be a relationship between earnings and inflation, as in the following graph;
How would you describe this relationship?
Note: Click on the graph to view the source. More analysis and graphs, including inflation figures, can be found here.
