A few say increasing prices and larger figures in their bank accounts suggest they’re getting richer. But the truth is something much more uncomfortable: inflation quietly erodes the value of money. What appears to be growth tends to be merely a weaker currency. To grasp this, consider a simple house bought 40-odd years ago, and compare its worth in dollars and gold. This story demonstrates how inflation deceives us into thinking we are wealthier, though in truth our purchasing power has diminished.
A house in 1962 cost $16,000. Back at the time, gold was $35 an ounce. This meant the house was valued at about 457 ounces of gold. Fast forward to today; the same house is worth $750,000. At first sight, this sounds like a huge gain. But gold today is about $3,300 an ounce. By that yardstick the house today is worth just 227 ounces of gold. In real terms, the house has dropped half its value as compared to gold. This shows how inflation distorts reality. People see bigger dollar amounts and assume they have become richer. In fact, the measuring stick of the dollar has depreciated. What once purchased more now purchases less.
Inflation occurs when the value of money decreases over time. Governments and central banks print some additional currency, or expand the money supply to make the dollar less valuable. You can drive up prices not because you suddenly are gaining in value over time but because the currency that used to buy those goods is losing ground and its value. Politicians, after all, usually enjoy one big benefit out of inflation. Higher prices make economic growth look stronger on paper, and so do wages make those workers. But the real purchasing power of these wages is lower in actual fact. That is why inflation is referred to as a hidden tax, it diminishes savings and earnings without people noticing immediately.
Gold is widely benchmarked in part because it remains valuable throughout generations. Gold, unlike paper money, does not have the capacity to be endlessly printed. We see the true story when we compare assets such as homes or salaries to gold. What might sound impressive today is a million dollars. But in purchasing power terms, it’s $80,000 in 1970. That means somebody who makes a million dollars now is not richer than someone who made $80,000 in those days. The dollar has weakened, and inflation has made the numbers seem bigger.
Inflation puts people in the position to believe they are better off. A house of the past $16,000 now turns out to be $750,000. The salary, when a $10,000 salary now amounts to an amount of $100,000. When it is measured against stable value indicators like gold, the increase is no longer real wealth, it is just the erosion of the currency. This illusion helps governments assert progress and economic growth. Politicians can say wages are increasing and the economy is growing. But the average person is not being wealthier. They’re just running faster to be in the same place, since the cash in their pocket buys less every year.
It is important to understand inflation for everyone, all groups. It impacts how much is put away in savings, pension plans and purchasing homes or investing. People will make bad financial decisions if they are sure that larger numbers equal more money. Acknowledging this decreases buying power, helping to safeguard (by investing in assets with value, be it gold, real estate or something physical) allows people to prevent inflation.
Inflation isn't just inflation; it is a weakening currency. Today’s dollar purchases much less than it did 50 years ago, no matter how large the figures look. The house is worth $750,000 and this might be a fortune, but it has a value of less than half the value of gold in 1962. This is the hidden cost of inflation: it steals quietly, masquerades as growth and leaves people believing they are richer when they aren’t.
