72 and the cost of living crisis

With the cost of living crisis at an all-time high, we turn to the number '72' to help demonstrate the dramatic impact of inflation on our pockets.

Luca Pacioli[1] was a 15th century mathematician who developed the 'Rule of 72'. This rule can be used to demonstrate how quickly higher prices would halve the value of the money in your pocket. To work out how long it takes for the money in your pocket to halve in value (or spending power), simply divide 72 by the inflation rate.

By way of an example, our own RSM UK economist, Thomas Pugh explained the risks of inflation reaching 15% only last year[2]. If we assume that the inflation rate remained at that percentage each year, then it would take approximately five years before the pound in your pocket became half the value it is now. To get to that answer, divide 72 by the inflation rate of 15, which equals five.

More recently, inflation has averaged 1.75% in the UK over the last three years. At that rate, it would have taken 41 years for the pound in your pocket to halve in value. This illustrates the dramatic impact of higher inflation:

• 15% takes five years; and
• 1.75% takes 41 years.

This is the impact of compound interest. The reverse can be applied to investing (£1,000 invested now at 6% would become £2,000 in approximately 12 years’ time (=72/6).

Other economic forecasts are available, and some are even suggesting inflation could reach 22%[3]. If inflation remained at 22%, then it would take just over three years for the pound in your pocket to halve in value.

In these examples, the Rule of 72 only works if there is a constant inflation rate. Let us hope that inflation soon returns to the percentages that we have all become accustomed to over the last few years.

[1] Find out more about Luca Pacioli at University of St Andrews

[2] See LinkedIn post

[3] See The Times

[4] 72 is also the standard number of holes in a golf tournament unless you are of the LIV Golf persuasion, in which case it is 54. As far as I know there isn't a Rule of 54 that works for anything.

[5] This article was inspired by the book Quit Like a Millionaire by Kristy Shen and Bryce Leung.