Part I — The Basics · Lesson 03 · Your Money

Inflation eats you slowly

Your dollar shrinks every year

Inflation is the slow theft you don't see. Prices rise; your salary mostly keeps up; you don't feel poorer year to year. But the dollar in your savings account is shrinking the whole time. The official inflation target in the US is 2% per year — which means the central bank is explicitly designing for your dollars to lose half their purchasing power every 35 years.

Set a year and an amount. Watch what's happened to it.

What this dollar bought, and what it buys now

Item	1985 price	2024 price	Multiplier
New car (Honda Civic)	$5,400	$24,250	4.5×
Median home (US)	$82,800	$420,400	5.1×
Year of college (public, in-state)	$1,300	$11,300	8.7×
Gallon of gas	$1.20	$3.30	2.8×
Loaf of bread	$0.55	$2.50	4.5×
Movie ticket	$3.55	$12.50	3.5×
Health insurance (family/yr)	$2,000	$24,572	12.3×

The general price level rose about 3× since 1985. But notice: housing rose 5×, college 8.7×, healthcare 12×. These are sectors with constrained supply, government subsidies driving demand, or both. Wages over the same period roughly tripled — meaning workers can keep up with general inflation but fall behind on the things that matter most for life outcomes.

Why the official "2% target" is contested: A 2% inflation rate sounds modest. Compounded for 35 years, it halves your purchasing power. The justification is that some inflation prevents deflationary spirals (where falling prices cause people to delay spending, causing more falling prices). But 2% wasn't sacred — it was set by a New Zealand central banker in 1989 and adopted globally because it sounded reasonable. Other targets — 0%, 4%, NGDP-targeting — would produce different distributional effects.

Inflation isn't just math — it's distributional

Inflation hurts savers and helps debtors. If you have $100,000 in cash and 5% inflation hits, you lose $5,000 of real value. If you owe $100,000 in fixed-rate debt and 5% inflation hits, you've effectively been forgiven $5,000 of debt. Who's the biggest debtor in the world? The US government. Mild persistent inflation is, in effect, a slow transfer from savers to borrowers — and from individuals to governments. This is one reason hard-money advocates (gold, Bitcoin) are intense about inflation: not because they're cranks, but because the design of fiat money systematically advantages those in debt at scale.

What you just learned

Cash is not a safe asset. It's an asset that's quietly bleeding value at a pace set by people you didn't elect. The opposite of being financially literate is leaving large amounts of money in checking accounts and feeling secure about it.