How Inflation Destroys Purchasing Power: The Rule of 72 and Defensive Investing

While volatility causes temporary dips in asset prices, inflation is the silent, permanent destroyer of purchasing power. A zero-risk savings account holding cash at 0.5% interest during 3.5% inflation guarantees a 3% annual loss of real wealth.

The Purchasing Power Half-Life

By applying the Rule of 72 to inflation, you can estimate how many years it will take for your money to lose 50% of its purchasing capacity:

• At 3% inflation: 72 / 3 = 24 years to lose half its value
• At 5% inflation: 72 / 5 = 14.4 years to lose half its value
• At 7% inflation: 72 / 7 = 10.3 years to lose half its value

Frequently Asked Questions

What asset classes historically beat inflation?

Equities (stocks), prime real estate, Treasury Inflation-Protected Securities (TIPS), and productive business ownership have historically outpaced inflation over 10+ year horizons.