Let’s say one year ago you deposited $10,000 in Marcus account by Goldman Sachs which pays .8% interest and today you are about to collect $10,080 in cash. What is the real return on your investment? That depends on what money can buy these days relative to what you could buy a year ago.
How do you measure that?
The consumer price index (CPI) measures purchasing power by averaging the prices of goods and services that an average urban family of four buys for day-to-day living.
In the last year the CPI has risen by about 1%.
The nominal interest rate is the growth of your money, the real interest rate is the growth of your purchasing power, which in this case would actually have been negative because .8% - 1% = -.2%. You would have lost $20 in purchasing power.
A CPI of 1% is quite low. I think with all the government stimulus the CPI will be higher than 1% in the next couple of years.
This is why I think people are going to be pushed up the risk curve; normal savings accounts are going to leave people with less purchasing power than when they put their money in. They’re going to be more willing to dive into stocks because losing purchasing power isn’t acceptable.
For you personally, are you comfortable with losing a bit of purchasing power with the money you have in savings?