A New York subway ad raves,
“In 1986 the subway and bus fare was $1. That’s $1.89 in 2008 dollars, while today’s fare is about $1.17.”
A savings? Yes. The subway fare is cheaper in 1986 dollars. However, the unseen headline is that it would take $1.89 in today’s dollars to buy what $1 could buy in 1986 dollars. This means a dollar earned in 1986 can buy only 54% of what it could buy in 1986; the dollar’s value declined 46% in about 20 years.
If you invested the $1 in 1986 and earned 8% a year, you would now have $4.43, a 343% increase in dollars, not purchasing power. After we reduce the total dollar amount by 46%, to factor in the decline in the value of the dollar mentioned above, the value of your investment in 1986 dollars falls to $2.04, a 105% increase. It’s still an increase, but much less. By creating more dollars, the fed/gov’t took $2.39 of your investment. You may have $4.43 but you can only buy $2.04 worth of goods.
The subway company might want to take down that ad.