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Andy

"The fact that the gap grew larger the more time we went back told us little, as it invited readers to read into it more than what it truly was, the time value of money." Inflation is not particularly related to the time value of money, and does not necessarily increase over time. It is essentially a combination of total output and money supply. If money supply were held constant, dollars would actually become *more* valuable as time went on, not *less* as the graph shows (assuming our productivity continued to advance). I still agree that having the second line is useless, and that the inflation-adjusted line is the correct one to show. They don't illustrate any connection between the price of oil and the inflation level. If they wanted to, they should use a much different graph anyway. I suspect there was debate over which line to show, and they compromised by showing both.

Andy

I have to do line breaks manually? Dang, sorry for the poor formatting of my previous post, and for not previewing... let me try again:

"The fact that the gap grew larger the more time we went back told us little, as it invited readers to read into it more than what it truly was, the time value of money."

Inflation is not particularly related to the time value of money, and does not necessarily increase over time like interest rates. It is essentially a combination of total output and money supply. If money supply were held constant, dollars would actually become *more* valuable as time went on, not *less* as the graph shows (assuming our productivity continued to advance).

I still agree that having the second line is useless, and that the inflation-adjusted line is the correct one to show. They don't illustrate any connection between the price of oil and the inflation level. If they wanted to, they should use a much different graph anyway.

I suspect there was debate over which line to show, and they compromised by showing both.

Matthew

I disagree. I do a lot of these charts, and basically even a pretty sophisticated financial audience needs some help in understanding concepts such as the 'real price of oil' and unless you show both lines, people still seem to think 'oil was $100/b in 1980, and prices were much cheaper then'. Showing both allows people to understand that the price they were paying was $20/b, but it's equivalent to $100/b. Of course then you really should show it as a % of disposable income (higher still!).

Bill

Re: As it stands, the green portion has about the same area as the red.
It's a hazard of 3D - which should not be used!

Kaiser

Andy & Matthew: for a sophisticated audience, I see the point. But the general reader, the blue line doesn't add anything to the story. Imagine what the gap looks like if inflation were to be 3% every year for all those years.

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