Chapter 1 · Mission 1 · 1950–1959

Inflation and compound interest

Inflation is the general rise in prices. In the US it is measured by the CPI (Consumer Price Index): the price of a typical basket of things a household buys.

Goes with Mission 1: Compound interest vs. inflation.

The idea

In short

Inflation

1Inflation is the general rise in prices. In the US it is measured by the CPI (Consumer Price Index): the price of a typical basket of things a household buys.
2Money that stays the same number loses value: with 3% inflation, $100 buys what $97 bought a year earlier.
3Nominal return is the number in your account. Real return is what it buys after inflation. Quick rule: real ≈ nominal − inflation. Exact: (1 + nominal) ÷ (1 + inflation) − 1.
4In the game: Wealth (blue) is nominal; Purchasing power (orange, dashed) is real.

Compound interest

1You earn returns on your earlier returns. Final value = start × (1 + r)^years.
2Rule of 72: 72 ÷ yearly return = years to double your money. At 6% → 12 years; at 10% → about 7.
3The same rule works for inflation: at 3% inflation, idle money loses half its purchasing power in about 24 years.
4Time matters more than the return: the effect speeds up in the last years.

In the data

What history shows

$10,000 from January 1928: invested or kept as cash

Invested in US stocks, $10,000 grew to $31,192 by the end of 1949, returns earning returns. Kept as cash, it still read $10,000 but bought what $7,334 bought in 1928: prices rose 36%.

Real data, January 1928 to December 1949: years before any mission, so nothing is given away. Monthly returns from Robert Shiller and Aswath Damodaran.

Real figures

The numbers

Finish Mission 1 to see these real figures.

Remember

Takeaways

Finish Mission 1 to see the takeaways.

Practice, not scored

Quiz

1. At 7% a year, how long does it take to double your money?

2. Your savings account pays 1% and inflation is 3%. Do you gain or lose purchasing power?

3. Why did the mattress lose money if it kept $10,000?