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That's bananas!
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THE SCENARIO
I moved to California in August of 1993. When I arrived, I needed to eat, so I went grocery shopping. I always liked eating fresh fruit, and the local market had bananas for 25 cents per pound.
Flash forward to today (March of 2018), and I still enjoy eating fresh fruit. However, my local store sells them for 67 cents per pound today.
The question: What has the average annual inflation rate* been on the bananas I've bought? Assume monthly compounding.
* Discussions of inflation tend to be contentious, and there are different ways to calculate aggregate inflation figures. Governments calculate and publish figures that span their entire economy or certain sectors, and those determinations often omit volatile prices like those on food and fuel. Calculating the inflation in prices on a particular item tends to be a bit simpler, and that's what we're doing here.
I've been paying attention to the price of bananas over the past several months, and there haven't been any sudden spikes or drops, so it appears that their price has recently been less volatile than the prices of some food items sometimes are. Since I actually remembered how much they cost nearly 30 years ago (4 lbs per dollar), I was curious as to the inflation rate and I thought you might be, too.
THE SOLUTION
In order to solve this one, we need to find out how long it's been since I first moved to
California cbd. August 1993 to August 2017 is 24 years, which is 288 months. August 2017 to March 2018 is 7 months. So the total number of months that's passed is 288 + 7 = 295.
Now it's calculator time. First things first, make sure the calculator is using 12 Payments per Year.
N: 295 (I moved to California 295 months ago, which does indeed make me feel old)
I/YR: (This is what I'm trying to find)
PV: -0.25 (Each pound of bananas was 25 cents back then)
PMT: 0
FV: 0.67 (Each pound of bananas is 67 cents today)
Using monthly compounding, the price of bananas has increased by an average of 4.02% per year since the summer of 1993.
What do you think? Do you consider the power of inflation when you consider where and how to invest your money? If so, what figure do you use, and how do you determine it? If not, what's your rationale? Let us know in the comments!
