Monday, April 02, 2012

The Inflation Problem

Research has shown that financial know-how peaks in middle age (at an average age of 53, according to one study) and declines as people get older. Most of the research focuses on the vulnerability of aging Americans to financial scams. But there is another perhaps equally serious problem that arises from declining financial sophistication: the apparent inability of many older Americans to understand or account for inflation.

Here is an example from a column published in a local newspaper in my area, written by a retiree with a Ph.D. no less: "If you ordered a beer at Yankee Stadium during the 1949 World Series, it sold for 35 cents. Pretty nice price, by 2012 standards at least."

No, the price isn't nice. Beer is cheaper today than it was in 1949 after adjusting for inflation. Thirty-five cents in 1949 is the same as $3.35 today. You can easily buy a beer at a bar or restaurant for less than $3.35.

The seeming inability of many older Americans to understand and adjust for inflation may play a role in the outsized anger of the gray-haired crowd toward government spending. Without factoring in inflation, everything seems to be getting more expensive, services appear too costly, the wages of workers look excessive. It's not much of a leap from that kind of thinking to, "I'm mad as hell and I'm not going to take it anymore!" Could blinkered thinking about inflation explain a lot of the crazy--such as the recent vote by the Senate Commerce and Tourism Committee in the nation's oldest state (Florida) to lower the hourly minimum wage for tipped workers from $4.65 to $2.13?

The government's inflation calculator is here. Bookmark it.

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