How Inflation has Been Robbing You of Your Money

Journalist:
John Weru Maina @bitmaina
September 28, 2014

How far does $20 get you these days? Not very far. If you have noticed that your shopping cart is getting emptier each year, then feel at ease because it is not all in your head.

There is a way to measure these things, and that is through the Consumer Price Index. If you have ever wondered how they can determine the inflation rate in the country, it is through the CPI.

Using CPI to determine changes in price

The CPI is defined as a “measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.” To measure the index, we often take a certain point in time as a reference point or base. In the US that base is 1982-1984. From the CPI, we can also get the inflation rate between any two points in time.

Let us look at the example in the accompanying image, of the 1998-2014 period. In 1998, the average annual CPI stood at 163.0. The latest average CPI for 2014 is 235.5. To get the inflation rate of 1998-2014 period, we will first get the difference of the two CPIs which is 72.5.

Next we will divide that by 1998 CPI, which 163.0 and multiply by 100 which gives an inflation rate of approximately 45% over 1998. In other words, you would have to add an extra $9 for an item you bought at $20 in 1998. So yes, things are getting more and more expensive.

Bitcoin compared

In contrast, Bitcoin‘s fortunes have been improving speedily. When the currency was first introduced in 2009, Bitcoin was being exchanged between enthusiasts for next to nothing. The first real Bitcoin transaction was done by a user named “Laszlo” who bought a pizza for 10,000 BTC, and we honestly hope that the pizza maker in question was far-sighted enough back then. Bitcoin achieved parity with the dollar in April 2011 and has never since looked back. The currency caught the attention of the mainstream media when it hit the $1,000 mark on November 27th, 2013.

It is believed that Bitcoin will eventually become a very valuable asset, with some enthusiasts predicting that the price may hit as much as $10,000 in the next few years. That, of course, remains to be seen.

Images from pbworks.com and Shutterstock.

Last modified (UTC): September 28, 2014 15:37

John Weru Maina @bitmaina

John Weru is a Kenya-born writer who has been writing since his teenage years. He believes that digital currencies hold the key to unlocking the potential of e-commerce and m-commerce globally, and powering Africa's participation in international trade.