Welcome back for another short but sweet edition from the Tulip Teacher whose hope it is that economic life lessons are subversively slipping into your long-term memory. Today, I want to address a serious topic that keeps me up at night; the price of Freddo’s. Freddo’s used to be 10p and they definitely used to be larger. When that titchy chocolate amphibian reaches 50p it should be the beacon of an all-out revolution.
Whilst I hope I’m not alone in wanting to campaign for cheaper chocolate frogs, ultimately nearly all general goods, assets, and services are subject to the same phenomenon known as ‘inflation’. That is, a general increase in the price level.
Year on year prices change and usually in (definitely not always) an upward trajectory and though there is no constant level of inflation, the UK government aims to keep it at around 2% per year.
2% does not sound like much. If a weekly shop is £100, next year you might expect to pay around £102. Not exactly an attention-grabbing headline. But across a lifetime of weekly shops and 2% inflation, ceteris paribus (posh economic speak for ‘keeping all other variables the same’), your weekly shop chips away at your relative wealth if you do nothing due to the compounding effect of interest.
Let us assume we buy the same items (in terms of quality and brands etc) and there is an average of 2% inflation per annum (again, the government’s target), here’s the proportion of how much of your regular shop you’d be able to buy with £100 across decades.
In 50 years £100 will only buy around a third of your full weekly shop that you can buy today. That is the slow burning reality of inflation that can creep up on you.
Sadly, the precious Freddo treat might just be a cost that we, as a society, must bear but more seriously the lesson here is if you wish to maintain your wealth, your earnings and savings should grow at least as fast as the rate of inflation year on year.
1. Freddo Image