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What's a better way of looking at it or what happens in reality (rest assured).

Historical percentage rates of inflation are only an estimate of what might actually happen in reality. In addition, what's included in the 'CPI' or Consumer Price Index does not always reflect a true increase in the cost of living, because they don't (and can't) include everything in the index--what they do include can be somewhat arbitrary. The arguments about what should and should not be included are never-ending.

For example, using the calculators at the website indicates that the cumulative inflation rate from January 1960 through December 2003 was 529%. That doesn't mean that everything increased by 529%--some things increased more, some less, some decreased. Here are two examples:

In 1960, a slice of pizza in New York cost 15 cents. At 529% it should cost 75 cents now, but it doesn't--it costs about $1.50--double the inflation rate over the period. The same is true for the subway fare--from 15 cents to $1.50. On the other hand, one can buy a basic calculator now for $10. In the 1960s a basic adding machine cost about $200--it's price has decreased substantially.

If we're to prepare for retirement we need to estimate the rate of inflation over time. In using 'average' historical inflation rates to predict future purchasing power, we are simply making a 'best guess' estimate--there's no way of knowing what will happen 'in reality'.


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