Suppose inflation was 11% last year, and 11% this year. Is that a total inflation of 22% for the two years?<\/p>\n
Consider a sample of purchases costing $100. After the first year, 11% inflation means you will pay 11% more for the same items.<\/p>\n
11% of $100 is $11. Therefore, you will pay $111 by the end of the year for those same items.<\/p>\n
In the second year, another 11% inflation assaults your pocketbook. By the end of the second year, you will pay 11% more on $111.<\/p>\n
11% of $111 is $12.21. Therefore, by the end of the second year, you will pay $111 + $12.21 = $123.21 for the same goods.<\/p>\n
So after two years, you are paying an additional $23.21, or 23.21% more for those same items, which is higher than 22%.<\/p>\n
This is because percent increase (or percent decrease) is exponential<\/em>, and not linear<\/em>. Exponential growth is what grows your savings account over the years, and what allows inflation to eat it away.<\/p>\n Note that the longer the time period, the bigger the difference between the exponential and the linear value.<\/p>\n For instance, suppose there was 11% inflation for 10 years. What would the price of your $100 basket of goods be?<\/p>\n Using the exponential equation, we have<\/p>\n $100(1 + 0.11)^10 = $283.94<\/p>\n That's a 283% increase!<\/p>\n Can you figure?: If you lost 5% of your weight one year, and then lost another 5% the next year, would you have lost a total of 10% of your original weight?<\/p>\n There are many confusions related to percents because of this principle of exponential growth. For instance, suppose you had investments totaling $1000 and during a market downturn, you lost 30% of that investment.<\/p>\n 30% of $1000 is $300, so your investments are now worth $1000 \u2013 $300 = $700.<\/p>\n Now, suppose the market goes back up 30%. Are you back to your original investment value of $1000?<\/p>\n No! 30% of $700 is $210. Adding $700 + $210 = $910. You are still down $90.<\/p>\n $300 is approximately 43% of $700. So to increase your $700 back up to $1000, there would have to be a 43% increase in the market!<\/p>\n Can you figure?: If you lost 20% in the stock market, what percent would the market need to increase to recoup your loss?<\/p>\n Such is the mysterious way of percents.<\/p>\n","protected":false},"excerpt":{"rendered":" Suppose inflation was 11% last year, and 11% this year. Is that a total inflation of 22% for the two years? Consider a sample of purchases costing $100. After the first year, 11% inflation means you will pay 11% more for the same items. 11% of $100 is $11. Therefore, you will pay $111 by … Continue reading \"Mysteries of Percents\"<\/span><\/a><\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[9],"tags":[30,8],"class_list":["post-27","post","type-post","status-publish","format-standard","hentry","category-robin","tag-economics","tag-math"],"_links":{"self":[{"href":"https:\/\/www.useriscontent.com\/blog\/wp-json\/wp\/v2\/posts\/27","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.useriscontent.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.useriscontent.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.useriscontent.com\/blog\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/www.useriscontent.com\/blog\/wp-json\/wp\/v2\/comments?post=27"}],"version-history":[{"count":0,"href":"https:\/\/www.useriscontent.com\/blog\/wp-json\/wp\/v2\/posts\/27\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.useriscontent.com\/blog\/wp-json\/wp\/v2\/media?parent=27"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.useriscontent.com\/blog\/wp-json\/wp\/v2\/categories?post=27"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.useriscontent.com\/blog\/wp-json\/wp\/v2\/tags?post=27"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}