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Cumulative Effects Of Inflation Revisited

w00d00w
  |     |   360 posts since 2012

Consider this scenario: on December 31, 2019, an investor buys a $10000 4 year CD at a rate of 3% with interest compounded monthly (as a point of reference, Ken's 5 year online CD yield index for December 2019 was 2.2%). At maturity, that investor would have received $11273.

The CPI-U report in January 2020 (which measures prices in December) was 257.971. The January 2024 CPI-U was 308.417. Overall, a 19.55% increase. Consequently, purchasing $10000 worth of goods/services at the end of 2019 would cost $11955 at the end of 2023.

So that CD with an above average rate at the time of purchase produced a negative real return. In order for the investor to have reached the breakeven point with CPI-U inflation and preserve purchasing power during that time interval, a 4.47% CD rate (with monthly compounding) would have been needed.

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choice1
  |     |   371 posts since 2023
Apples and oranges. Try another revisit. If one is entirely relying on CD interest income for day to day purchases…they should be parking their $s elsewhere.

Most retirees/CD buyers do not spend the inflation numbers and rarely spend the net CD rate of return. Capital type items are in a different line item. If you exceed those numbers better go back to work and/or go on the political circuit and spin the broken record/yarn.
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