This Chart shows the Average Annual Inflation Rate for each decade. Each bar represents the geometric mean for the decade (not the total cumulative inflation for that 10 year period ).
For two of the decades below you would think the numbers were large enough to be for the entire decade rather than the average annual rate for a single year. Both the teens and the 1970's had huge annual inflation rates. The teens (beginning in 1913 when the U.S. government formed the Federal Reserve and began tracking inflation) averaged almost 10% a year and the 1970's averaged just over 7% a year. This resulted in a cumulative total inflation for the years 1913 until the end of 1919 of 97.96% (in only 7 years) while the inflationary 1970's saw 102.91% over the entire decade.
You think that 7% inflation in the 1970's is terrible but 2% or 3% per year since 1990 isn't so bad right? Well, the total cumulative inflation for the almost 22 years from January 1990 through September 2012 is 81.64%. In other words, something that cost $100 in January of 1990 would cost $181.64 in September of 2012 and that is what happens at "low" inflation rates.
The following chart shows how much inflation was "racked up" during the each decade rather than simply the average for each year during the decade. See: Cumulative inflation per decade Article for more information about this chart. So we can see that at during the 1990's things cost about 1/3rd more at the end of the decade as they did at the beginning.
As we are nearing the 100th anniversary of the creation of the FED what have they done to our currency? See: total cumulative inflation since 1913 for the answer.
Note: We have recently updated the method of calculating the averages so they will be slightly different than you may have seen previously. That means that instead of taking the annual inflation rates for each of the ten years of the decade and then averaging them all together we have used the geometric mean. The geometric mean is also called the compound annual growth rate (CAGR) and is typically used to calculate things like average investment return.
This generally produces a slightly lower number but it is the accepted method of calculating average percentage rates. According to the University of Toronto Mathematics network "The geometric mean is relevant any time several quantities multiply together to produce a product. The geometric mean answers the question, "if all the quantities had the same value, what would that value have to be in order to achieve the same product?" For more information on arithmetic vs. geometric means see: Applications of the Geometric Mean.
The typical way of averaging is called the "arithmetic mean." So exactly how much difference does using the geometric mean make vs. the arithmetic mean make in our data? Interestingly, the answer is "that depends." In our data some decades were almost identical and others were several tenths of a percent apart. The most recent decade (2000-2009) changed from 2.57% to 2.56% and the long term average changed from 3.37% to 3.24%. The 1990's didn't change at all. The biggest change came during the six years from 1913-1919. The arithmetic mean produced 8.7% while the geometric mean actually produced a significantly higher number of 9.8%. The 1920's was the most interesting going from a positive 0.08% to a negative -0.09%. The 1930's went from -1.94% to -2.08%. The 1940's inflation rate changed from 5.63% to 5.52%. Many decades were extremely close The 1950's went from 2.06% to 2.04% a mere 2/100ths percent difference. The 1960's had a 4/100ths difference going from 2.36% to 2.32%. The 1970's went from 7.09% to 7.06%. And the 1980's went from 5.55% to 5.51%.
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It is interesting to note that the inflation for the "teens" decade was the highest at 8.70% and the 70's were close on their heels at 7.09% while the 20's have virtually Zero inflation on an annual basis and over 10% deflation (falling prices) over the entire decade.
The decade of the 30's showed more deflation where prices actually declined on an annual basis. It isn't hard to figure out that prices were falling during the depression (the 30's).
Note that the most prosperous decades were those of low inflation like the roaring twenties (although the prosperity was primarily for the rich and middle class while the poor farmers suffered), the fabulous fifties, and the nineties. Both the 20s and the 90s culminated in a stock market crash while the decade with deflation is known for the poverty they included. Interestingly, deflation doesn't always equal depression. A truly healthy economy with increasing productivity and no increase in money supply will result in lower consumer prices and even more wealth to go around.
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You may enjoy this article- Is there a correlation between inflation and the stock market ? This chart compares decade inflation and stock market returns during the decade.