The 2% Solution

Little Things Mean A Lot

Blow her a kiss from across the room
Say she looks nice when she's not
Touch her hand as she pass her chair
Little things mean a lot

And if you keep those things little, they will mean a lot more.

Sherlock Holmes was, in least one movie version, addicted to a 7% solution of cocaine.  Seven percent doesn’t seem like very much, so 2% seems even less.  For most of my career I have been involved in more and more sophisticated ways of forecasting things.  I remember one of my bosses from over forty years ago, claiming  that growth is almost always 2% per year, no matter how sophisticatedly you forecast it.  And life is change, i.e. growth.  “It is how we differ from the rocks.”  which is why the growth rate is not 0%.  So changing the growth rate from 2% to 4% doesn’t sound like a big deal, correct.  Well,… Not Exactly.

From the 1913, the beginning of the historical reporting of the Consumer Price Index, to 1944, the year of the Bretton Woods Conference, inflation, growth, was 1.87% per year.  From Bretton Woods, when the US Dollar became the international trading currency convertible into gold,  until the Nixon Shock of 1971, when the international dollar was no longer convertible into gold, inflation was 3.13% per year.  From 1971 to today, inflation has been on average 3.86% per year.  The annual rate of change does not seem so dramatic.  But just as a continual but small increase in temperature in a pot of water will boil a live lobster,  small rates of change over a long period of time can be consequential. If we concentrate on the change in inflation from say 2018 to 2019, which was only 1.76%, we miss this long term change.  From 1971 to 2022, the change in long term inflation from 2% per year to 4% per year has meant that a dollar in 1971 was worth only $.14 in 2022. Had inflation remained at 2% per year over this same period, that dollar would be worth almost twice as much. 2% per year extra may seem like a little, but it means a lot.