Central Banks' 2% Plan to Impoverish You

The 2% target is low enough that the household frogs in the kettle of hot water never realize they're being boiled alive because the increase is so gradual.

A comment by correspondent David C. suggested the importance of demonstrating the impoverishing consequences of central banks reaching their 2% inflation target. David observed: "That central bankers aren't all hanging by their necks from lamp posts everywhere is a testament to how scarce are those who grasp exponents and compounding."

Anyone with basic Excel skills can calculate the cumulative impoverishment caused by central banks' "modest" 2% annual inflation. Here is my worksheet:

Column 1: year
Column 2: index starting with 100
Column 3: annual inflation sum (2% of previous year's total index)
Column 4: cumulative total index

1 100.00 2.00 102.00
2 102.00 2.04 104.04
3 104.04 2.08 106.12
4 106.12 2.12 108.24
5 108.24 2.16 110.41
6 110.41 2.21 112.62
7 112.62 2.25 114.87
8 114.87 2.30 117.17
9 117.17 2.34 119.51
10 119.51 2.39 121.90

Ten years of modest 2% inflation robs households of nearly 20% of their purchasing power. What was $100 in year 1 costs about $122 after 10 years of "modest" 2% inflation. Put another way, $100 in year one is only worth $81 in year 10.

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