A dollar is not a dollar. It is completely relative to what it will buy for us, referred to as purchasing power. And what it will buy for us (i.e., its purchasing power) changes over time. Most of the time it declines. The following chart shows the change in the purchasing power of a dollar since 1914.
A decline in the purchasing power of a dollar is called inflation. Maybe it should be called deflation, because the value of a dollar falls, but it is called inflation because the cost of goods — the things we buy — rises. As the above chart shows, the purchasing power of a dollar rose during the period from 1920 to 1934. During this time, the cost of goods and services fell as we faced the Great Depression, and the purchasing power of the dollar increased. This is deflation (prices fall).
From the chart, you can see that the dollar today has the same purchasing power as about 5 cents in 1914. That’s an erosion of 95% of the value of a dollar.
Some simple examples of the steady rise in the cost of goods: In 1950 a gallon of gas was 20 cents, a first-class stamp was 3 cents, a McDonald’s shake was 20 cents (today it’s $1.79) and a typical house went for around $17,000.
The government expends considerable effort to measure inflation. It regularly assesses the prices of goods and services, like those above, and publishes the rate of inflation. The most common measure of inflation is the Consumer Price Index. The following chart shows the annual rate of change in consumer prices, as measured by the Consumer Price Index, since 1948. As you can see, the annual rate of inflation has hovered around 3% since 1983.
What’s the point here? You must raise prices every year. Your costs, no doubt, are going up — roughly at the rate of inflation. If you buy large amounts of certain materials, such as fuel, lumber or even such things as cheese, your costs may fluctuate more wildly.
Keep track of your overall costs and raise your prices every year. If you raise them regularly, in small increments, along with the steady rise in your costs (inflation), your customers will hardly notice. But if you miss several years and then have to raise more steeply, you not only have needlessly lost profit for a few years but you’ll likely give a few of your customers just enough reason to try a competitor.
Worried about raising prices? Listen, everyone knows that inflation is persistent. Your customers will understand when you raise prices to keep up with inflation — so long as you do it every year. And think about it: The reason inflation exists is because everyone else is raising their prices. Your vendors are, and so are your customers (unless you sell to consumers). Raising your prices will not make you money, it’ll just keep you from losing.
This article originally appeared in The Business Owner Journal, the periodical of choice for owners of small and midsize private businesses. All rights reserved, D.L. Perkins LLC. © 2012.
This publication is intended to provide general information on the subject matters covered. It is sold and distributed with the understanding that neither the publisher nor any distributor or advertiser is engaged in providing legal, tax, insurance, investment or other professional advice. The advice of a qualified professional should be sought before any reader applies a concept presented herein to his or her particular situation or business.
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