Question 1

What is purchasing power?

Accepted Answer

Purchasing power measures the quantity of goods and services that a unit of currency can buy. When prices rise (inflation), the same amount of money buys fewer goods, meaning purchasing power has decreased. For example, $1 from 1913 has the purchasing power of about $0.03 in 2025.

Question 2

How is the Consumer Price Index (CPI) used to calculate purchasing power?

Accepted Answer

Purchasing power is calculated by comparing CPI values between two time periods. The formula is: Purchasing Power Remaining = CPI (Start Year) / CPI (End Year). For example, if CPI in 1913 was 9.9 and in 2025 is 320.8, the purchasing power remaining is 9.9/320.8 = 3.1%.

Question 3

Why does the calculator start at 1913?

Accepted Answer

1913 marks the beginning of consistent CPI data collection by the Bureau of Labor Statistics. It is also the year the Federal Reserve was established, making it a natural starting point for modern monetary history in the United States.

Question 4

What caused the high inflation of the 1970s?

Accepted Answer

Multiple factors combined: the end of the gold standard (Nixon Shock, 1971), oil price shocks from OPEC (1973 and 1979), loose monetary policy, and government spending on Vietnam and Great Society programs. Inflation peaked at 14.8% in 1980.

Question 5

How does inflation affect retirement savings?

Accepted Answer

Inflation is one of the biggest threats to retirement security. If you need $50,000 per year today, you will need about $90,000 per year in 20 years at 3% inflation to maintain the same standard of living. This is why investments should outpace inflation.

Question 6

What is the Rule of 72 for inflation?

Accepted Answer

To estimate how quickly inflation halves your purchasing power, divide 72 by the inflation rate. At 3% inflation, purchasing power halves in 24 years. At 7% inflation, it halves in just over 10 years.

Question 7

Why was there deflation during the Great Depression?

Accepted Answer

Deflation occurs when overall demand falls dramatically. During the Great Depression (1929-1933), economic collapse reduced spending and prices fell about 25%. This was the most significant period of deflation in modern US history, and the dollar actually gained purchasing power.

Question 8

How can I protect my savings from inflation?

Accepted Answer

Strategies include: investing in stocks (historically return 7-10% annually), real estate (property values rise with inflation), TIPS (Treasury Inflation-Protected Securities), I Bonds with inflation-adjusted interest rates, and commodities like gold that often rise with inflation.

Purchasing Power Timeline

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