A lot of people think that inflation makes them poorer. I hear this all the time. It makes sense, right?
You might think: "Hmm, if my income stays the same, and prices go up (inflation), then I can't buy as much, so my real purchasing power has gone down. I'm poorer!"
And then you might think: "Actually, no matter what happens to my salary, I can buy more if prices are lower. So inflation always makes me poorer, no matter what."
Are you one of the people who thinks this? Then let's take this idea, and run with it, and see where it gets us. First, go to the BLS' inflation calculator, and enter a starting year of 1980 and an amount of $100, then hit "calculate". I did that, and I got a number of $286.76. That means that it would take $286.76 in 2014 to buy what you could buy with only $100 in 1980. In other words, the total inflation from 1980 to 2014 was 186.76%!
So imagine if there had been zero inflation from 1980 to now. Does that mean that you'd be 186.76% richer now than you are? That would be a pretty good deal, eh? You'd probably have a bigger house, at least one more car, and plenty of money in the bank!
In fact, it wouldn't just be you, right? All of America would be richer! The logic that "inflation decreases purchasing power" applies equally to each and every person, right? So if there had been 0% inflation since 1980, everyone in America would have a bigger house, another car, and would be taking nicer vacations.
OK, and it gets better. If inflation decreases your purchasing power, then deflation increases it. It makes sense, right? Deflation means prices go down. Lower prices mean you can buy more stuff. Duh. What could be simpler?
So if we only had deflation, we'd be getting much richer every year. The more prices went down, the more stuff we could buy. With 20% deflation, in a few years we'd all be living like kings, and with 90% deflation, our money would dectuple in purchasing power every year! In no time, we'd all have yachts, private jets, and yearly vacations to Europe and Japan. Right?
Wait, something's wrong here. This doesn't seem possible. But how can you escape this conclusion? If inflation decreases your purchasing power, then deflation increases it. That's definitely true, since deflation is just negative inflation. If prices go down, you can buy more stuff. But how on Earth could deflation create all those yachts and private jets out of thin air? It couldn't, could it?
So maybe there's a flaw in your thinking. Maybe inflation doesn't really make you poorer. How could that make sense? How could rising prices not reduce the amount of stuff you can buy?
Well, there is an answer, but I want you to think of it yourself. I'll just give you a hint: Whenever you buy something, the money you spend is someone else's income...