The Covid-19 period, which lasted almost five years (from 2020 to present), saw consumer price inflation of 22%. This sharp rise in prices caused the purchasing power of the US dollar to fall to $0.81. So, an after-tax return of 22% was simply necessary to break even.

And 22% over five years means 4.1% per year. (If that income is taxable, the rate is higher. For example, a 25% tax rate means the required return is 5.5%.) And remember, it’s just about achieving the break-even point – in other words, a rate of 0%. real back. So how have safe savers and investors fared? Poorly. This is how an investment in 1-month US Treasury bills would have been invested.

So, a loss of purchasing power with a 100% market rate investment (as determined by the Federal Reserve). No net income there. Instead, new savings are needed to compensate for the lost real value.

For more information, see “How to fix the Fed’s missteps during the president’s last three terms»

What about stocks?

We’ve been hearing about new highs for a while now, so the gains must be high, right? Well, they’re not as good as the media reported. This inflation of 22% (19% of lost purchasing power) must be compensated. And since inflation is a compounding factor, we can’t just subtract it. Additionally, because stocks are volatile, simply looking at an adjusted endpoint does not provide enough information.

Here are some comparative graphs.

First, the nominal results (as reported)

Nice gains, but what about inflation?

Then add inflation

So there is this CPI line that continues to undercut what is above it. But inflation is a compounding factor, so we can’t just subtract the numbers shown.

Now let’s move on to the “real” (inflation-adjusted) results.

Okay, there are the adjusted tops. Note, however, that new highs occurred later. Furthermore, they are nowhere near as high as the nominal figures. But now they are real.

The bottom line: Adjust all currency comparisons

Inflation, especially during a higher than normal period, should be removed from all dollar comparisons. Earnings, home prices, IRA balances, college tuition, minimum wage, restaurant prices, gas, dentists and veterinarians, cat food, hairdressers, etc. Why adjust all prices? Because if you exclude headline inflation, most current prices will probably just show what’s happening everywhere.