Inflation can be felt at gas pumps and grocery stores. The official government consumer price inflation rate was 2.7 percent higher as of March, compared to one year ago. It had been zero for all of 2009 and 1.6 percent for all of 2010, which was the reason provided as to why social security checks did not require a cost-of-living-adjustment this year.
However, consumer price inflation is building and could easily rise to 4 to 5 percent by the year's end, and possibly even higher if there is no retreat in gas and food prices. Producer price inflation is already near 6 percent. Incredibly, however, U.S. government bond yields are implying low future inflation. The U.S. Treasury can borrow today at a low 3.4 percent rate for 10 years, despite the very high budget deficit and plenty of money printing.
Savers lose if there is unexpected inflation because of the loss in purchasing power of the money saved. Conversely, borrowers win from unexpected inflation.
How does this work? The table below shows past returns for people who saved money with a 10-year U.S. Treasury. For example, someone who saved $100 via U.S. Treasury in 1950 would have accumulated $121 in at the end of the 10-year term assuming all annual interest payments have been saved. However, there was some inflation over that decade so their purchasing power was eroded to the point that the original $100 investment would have provided only $102 in purchasing power after 10 years. Other periods are shown below. People who saved money at the start of 1970 actually came out with much less purchasing power after 10 years.
What about going forward over the next 10 years? If you invest $100 in the 10-year U.S. Treasury bond today, you will have $131 in ten years based on today’s 3.4 percent yield. It is unlikely that we will experience the same kind of inflation seen in the 1970s. However, if such a high rate of inflation were to occur, then the $131 cumulative savings after 10 years would translate into only $64 in purchasing power. On the other hand, if there is low inflation like in the 1950s, then the saver would have $104 in purchasing power.