“Inflation is taxation without legislation.” — Milton Friedman
There is some element of truth to Friedman’s definition of inflation, but what really is inflation?
Inflation is the rate at which the general level of prices for goods and services is rising.
In my upcoming eBook, I refer to inflation as the silent killer as we rarely see it. While most people are familiar with inflation, we often underestimate the powerful impact it has on our ability to grow our wealth and eventually achieve financial freedom.
Ironically, we often think of financial freedom in terms of dollar value rather than in terms of the purchasing power of our dollars (the amount of goods and services you can buy). If you’re unable to acquire what you need when you need it, then you’re not necessarily financially free.
“Invest in inflation. It’s the only thing going up.” — Will Rogers
So, what’s the big deal about inflation, and why should we care?
If you had a $100,000 income 5 years ago, you could probably afford a decent starter home, take care of your expenses and have little left to save and invest.
Today, if you earn $100,000 income, your purchasing power will be less than it was a few years ago. You likely cannot afford a house today (particularly in the metropolitan cities) and even if you can afford one, you will end up incurring debt to keep up with your expenses.
In simple terms, a $100,000 income a year ago with a 5% annual inflation is only worth $95,000 today. And if you consider the fact that tax rate will increase with time, you can now see why inflation will quickly become a significant obstacle to building sustainable wealth.
“The natural tendency of the state is inflation.” — Murray Rothbard
For those that understand world economy at a deeper level, you know that inflation will never go away. In fact, the Canadian government and other governments around the world intentionally create inflation with policies. They need…