Why You Should Care About the Erosion of Money’s Power

If every trip to the store feels like your shopping basket has gotten lighter than it used to, it means the currency’s purchasing power has declined. This post explains, in plain terms for beginner investors, the mechanics behind falling purchasing power and backs it up with actual data on changes in the U.S. dollar’s purchasing power. Finally, it includes asset choices and an action checklist to help you stay resilient against rising prices.

The Basics of Purchasing Power Erosion

Nominal vs. Real
  • Nominal price: the price as quoted in dollars
  • Real value: the “actual value” after adjusting for inflation

Even if it’s the same $1, when prices rise, you can buy fewer goods with it. This is called a decline in purchasing power, and it’s typically measured by the Consumer Price Index (CPI).

The Compounding Effect of Inflation

Inflation nudges prices up a bit each year. Even 2% annual inflation compounds into a powerful force over time. Using the Rule of 72, if prices rise 2% per year, purchasing power halves roughly every 36 years. At 3%, it’s about every 24 years.

Why Does Money Lose Value?

1) Fiat Money and Policy Objectives

Modern money is fiat money, not convertible into gold. Central banks favor moderate inflation (typically a 2% annual target) to avoid recessions and support employment. Deflation is considered more dangerous for the economy because it raises the real burden of debt and encourages consumers to delay spending.

2) Credit Creation and Money Supply

Bank lending and fiscal policy expand the money supply (M2). When money grows faster than real output, more money chases the same goods and prices rise. That’s why inflationary pressure tends to build during the expansion phase of the credit cycle.

3) Demand, Supply Shocks, and Expectations
  • Demand-pull: when strong growth, rising wages, and low rates boost consumption
  • Cost-push: when raw materials and energy prices surge, or supply chains are disrupted
  • Expectations: if people believe “prices will keep rising,” that belief feeds into wage- and price-setting, making inflation self-reinforcing.
4) Fiscal Deficits and Seigniorage

Chronic fiscal deficits are financed through a combination of bond issuance and monetary policy, which exerts long-run downward pressure on currency value. Seigniorage (the profit from money creation) is part of the same story.

How Much Has the Dollar Actually Weakened?

The following rough estimates are based on long-term CPI-U data from the U.S. Bureau of Labor Statistics (BLS). Index levels change annually, so exact decimals need not match perfectly, but the direction is clear.

  • Versus 1913: What cost 1in1913costsabout1 in 1913 costs about32 in 2024. In other words, the dollar’s purchasing power has fallen by roughly 97% over a little more than a century.
  • Versus 1971 (end of gold convertibility): What cost 1in1971costsabout1 in 1971 costs about7.6 in 2024. Purchasing power is down about 87%.
  • Versus 2000: What cost 1in2000costsabout1 in 2000 costs about1.83 in 2024, a roughly 45% drop in purchasing power.
  • Versus 2020: Since the pandemic, cumulative inflation from 2020 to 2024 is around 20%, and purchasing power fell by roughly 17–18% over the same period.

The numbers may be jarring, but in a system where central banks tolerate moderate inflation and growth is fueled by credit, a “slowly weakening currency” is the norm.

Assets That Have Historically Beaten Inflation

In an environment where “money’s power” erodes, some asset classes tend to trend upward over the long run. Note that “trend” means “on long-term average,” not “always.”

Equities
  • Companies can grow nominal revenue and earnings through pricing power and productivity gains.
  • Over time, equity markets track nominal GDP and earnings growth. Broad diversification (indexes, market-cap-weighted ETFs) is key.
  • Risks: valuation excess, recessions, and rate spikes can increase volatility.
Real Estate (Real Estate, REITs)
  • Rising rents and higher replacement costs support asset values.
  • Risks: higher funding costs as rates rise, vacancies, and structural shifts by region and property type (e.g., offices).
Inflation-Linked Bonds (TIPS, Inflation-Linked Bonds)
  • Principal is indexed to CPI, directly defending real value.
  • Risks: when expected inflation is already priced in, upside is limited; interest-rate sensitivity (duration).
Commodities, Gold
  • Commodities can perform well during cost-push phases; gold serves as a reserve asset and safe haven.
  • Risks: spot price volatility, carry costs, and lower long-run expected returns versus equities.
Productive Businesses (Private Business, High-quality companies)
  • Businesses with productivity, brand strength, or network effects can more easily pass inflation through to prices.

Action Checklist: How to Prepare for Eroding Purchasing Power

  • Set a real return target: judge nominal returns net of expected inflation and on an after-tax basis.
  • Cash has distinct roles: an emergency fund is essential, but excess cash for medium/long-term goals risks erosion. Use MMFs and short-duration bonds to balance yield/liquidity.
  • Manage duration: in rising-rate environments, heavy long-duration exposure magnifies losses. Consider staggered maturities and mixing in TIPS.
  • Diversification & rebalancing: combine equities, bonds, and real assets; rebalance back to target weights periodically.
  • Global diversification and FX risk: reduce single-currency exposure; decide whether to hedge FX based on your objectives.
  • Prefer cash-flowing assets: steady dividends, rent, and coupons can help you stay the course during inflation.
  • DCA (Dollar-Cost Averaging): reduce timing stress and make volatility work for you.
  • Control costs: TER, spreads, and tax efficiency make a big difference to long-run results.

Keep a Balanced Perspective

  • Inflation is influenced by structural forces such as the business cycle, technological change, and demographics. You can’t assume high inflation will persist forever.
  • In disinflationary phases, bonds can act as powerful ballast in a portfolio.
  • Don’t get swayed by short-term performance; stay focused on preserving real value.

Key Takeaways

  • In today’s economic architecture, the erosion of purchasing power is closer to “design” than a “bug.” It’s the combined result of central banks’ moderate inflation targets, credit creation, and demand/supply shocks plus expectations.
  • Based on BLS CPI data, the dollar’s purchasing power has fallen roughly 97% since 1913, about 87% since 1971, and around 45% since 2000.
  • Over the long run, real and productive assets—equities, real estate, TIPS, and commodities/gold—play an important role. Just make sure you understand each asset’s risks and stick to the basics: diversification, rebalancing, and cost control.

In a world of rising prices, the goal is simple: not just to grow your money, but to preserve its “power.”