Inflation and the Rule of 72

No formula is more useful for understanding inflation than the rule of 72. Basically, the idea is to compute quickly how long it takes the cost of goods and services to double at various compounded rates of growth. For example, if houses were increasing in cost at 9 percent a year, how long would it take for the price of a home to double? The answer is easy to calculate. Simply divide the annual increase (9 percent) into 72 and you get a number of years it takes to double the price (eight years). If houses go up in price by 12 percent, it only takes six years to double in price (72 divided by 12 = 6), and so on. Of course, the same calculation can be used to predict how high food prices or car prices will be 10 years from now.

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