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No. 13 · Decisions · Economics

Inflation

Money quietly loses value over time, so plans set in fixed amounts slowly shrink.

Inflation is the gradual rise in prices that erodes what money can buy. Like a slow leak in a tire, it is easy to ignore until the damage adds up, and in extreme cases such as 1920s Germany it can upend daily life. It also shapes how businesses price, as with Costco's long-held $1.50 hot dog.

Think in real purchasing power rather than nominal amounts. Raise savings goals over time, seek cost-of-living adjustments in long contracts, and remember that money promised years from now is worth less than money today. Grow your skills and value faster than prices rise.

In the Almanac

“Weimar Germany”, 1923 · “Costco’s hot dog”, 1985

Both stories in full, three ways to use it and where it misleads.

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Inflation

Questions

What is Inflation?

Inflation is the gradual rise in prices that erodes what money can buy. Like a slow leak in a tire, it is easy to ignore until the damage adds up, and in extreme cases such as 1920s Germany it can upend daily life. It also shapes how businesses price, as with Costco's long-held $1.50 hot dog.

How do you use Inflation?

Think in real purchasing power rather than nominal amounts. Raise savings goals over time, seek cost-of-living adjustments in long contracts, and remember that money promised years from now is worth less than money today. Grow your skills and value faster than prices rise.

When does Inflation matter?

Inflation is one of the 35 mental models for decisions, the situations where you ask: Which way should I go? Within that, it belongs to “Valuing time and money”, alongside Discount Rate, Net Present Value and Switching Costs.

What is an example of Inflation?

Two stories show it at work: Weimar Germany (1923) and Costco’s hot dog (1985). Both are told in full in The Mental Models Daily Almanac, which has two stories for each of its 365 models.

Which mental models are related to Inflation?

Discount Rate, Net Present Value and Compounding Effect. Inflation itself comes from economics.