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How Inflation Works

By: Dave Roos

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Author's Note: How Inflation Works

If you are 30 or older — like some of us — then you have caught yourself saying things like, "A gallon of gas is almost $4? I remember when it was $1.25!" I call these grandpa (or grandma) moments. In our exasperation, we fail to account for the long-term effects of inflation. And in our refusal to acknowledge that we are indeed getting old, we forget that two decades have passed since gas prices were that low, or that $1.25 didn't feel particularly cheap back in 1993. What I'd like to know is the exact age at which we psychologically imprint prices. We use this internal reference point to compare prices for the rest of our lives. Maybe it's the year that you first start paying for things yourself, like gas. Or the first time you get a paycheck and realize the true value of money. Soon enough, we all have our first grandpa moment.

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