Central banks are flooding the world with liquidity to restart the economy and prevent deflation. Prices are gradually starting to rise again, as are interest rates, but purchasing power has been crumbling for a century.
In January 2021, dollars held by US households lost 1.5% of their purchasing power compared to the corresponding period of the previous year, and are thus at an all-time low, according to the Federal Reserve. For over a century, the trend has hardly ever seen a trend reversal. The dollars that Americans have in their possession make it possible to buy fewer and fewer goods and services.
John Plassard, an investment specialist with Banque Mirabaud, revealed Thursday in a study that the purchasing power of $ 100 during 1913 was only worth $ 3.47 in February 2021. The calculation of the power of Buying a currency (here, the dollar) consists of using data from the consumer price index inflation calculator, the housewife’s basket, established by the Department of Labor in the United States.
Rare changes in trend
The phenomenon of erosion of the value of the greenback has continued in recent years. Since 2003, the decline has been a third. Among the rare interruptions to this long-term decline, John Plassard mentions the financial crisis of 2008, but the upward correction of that period was unsuccessful. Other exceptions to the long-term trend are worth mentioning, such as the 31% increase between 1913 and 1923.
The purchasing power of a currency moves in the opposite direction of the consumer price index, according to the study. Economists speak here of negative correlation. The more inflation rises, the less purchasing power increases, says John Plassard. In an attempt to reverse the trend, the economist believes that one of the only ways is to increase wages. “If the debate does not date from yesterday, its application could well finally see the light of day, especially in the United States, if Joe Biden’s recovery plan were to see the light of day as it is,” he wrote. Indeed, the plan of the new president, which includes a quasi-doubling of the minimum wage, foresees that 32 million people could see their base salary increase. However, such wage inflation could lead companies to raise the prices of their products and services.
The same phenomenon in Switzerland
The phenomenon of currency erosion is also observed on the Swiss franc. According to world Bank, the purchasing power of 100 francs in 1961 fell to 24.42 francs in February 2021. Due to inflation, the current Swiss household would now have to hold 409.52 francs to buy the same basket of products as ‘with 100 francs in 1961. The statistics of the supranational institution do not exceed 60 years. The cumulative price increase reached 309.52%. The prices have therefore been multiplied by four.
Due to a methodological change, it is only possible to take account of the evolution of Swiss wages from 1993. On this basis, the increase amounts to 14.5% for nominal wages and 32 , 3% for real wages (after inflation). This means that the current 100 francs can only buy a consumer basket of 85.89 francs in 1993.