Almost everyone concerned with savings has always had one nemesis: inflation.

It's true, inflation slowly chips away at your savings efforts by decreasing your purchasing power, year after year.

To keep track of this a tool was even created: the CPI index.

For those who don’t know, the CPI (Consumer Price Index) is a global index used to measure the monthly average change in the prices of common consumer goods and services (transportation, food, medical care, etc.) It is one of the most frequently used tools to identify periods of inflation or deflation.

The following chart shows the evolution of inflation in the US according to their CPI index.

Looking at the chart, one might think: “if the average yearly inflation rate is 2.13%, and I beat this number with my savings, I won’t lose in purchasing power.“

But it’s not that easy… because another nemesis is lurking in the shadow. If we break down the price-inflation of different goods and services, here is what we have:

When organizing these goods and services from the most basic to the less essential (this is known as “Maslow’s hierarchy of needs”), what stands out is that prices for the most basic needs go up dramatically, while those for less essential goods go down.

Being an average, the CPI is misrepresenting the actual price-inflation of those essential goods and services, effectively hiding it in the shadow, making it your savings’ true nemesis: shadowflation.

Because if you are looking to build a comfortable nest egg for your old days, where are you going to spend your money: on TVs and toys, or medical care and housing?

 

Photo credit: Marco Verch