Purchasing Power Erodes Under Central Bank Expansion

The erosion of purchasing power is a persistent problem in modern economies.

Hyperinflation often gets attention, but it's not the only way money loses value. Central banks have expanded their balance sheets, and governments have increased borrowing since 2008.

In Britain and America, inflation has remained subdued while asset prices have risen. However, in 2020, policymakers' interventions coincided with fiscal transfers, stimulus checks, broken supply chains, and reduced productive capacity.

Prices surged, but purchasing power did not recover. A dollar from the financial crisis has lost approximately 35% of its value, while sterling has declined by about 40%. The pre-Covid comparison is also striking: since February 2020, the dollar has lost roughly 23% of its purchasing power and sterling around 24%.

The loss of purchasing power occurs gradually over time. At a permanent 2% inflation rate, money loses half its value in about 35 years, while at 3%, this point is reached after approximately 23½ years.