Inflation Remains Low
Standard measures of inflation remained low by historical standards in 2017. As Chart 1 shows, the Consumer Price Index for All Urban Consumers (CPI-U), the most commonly cited measure of inflation, increased by 2.1 percent for the year ending in December 2017. The Everyday Price Index (EPI), calculated monthly by AIER to reflect regular everyday purchases like food and gasoline and exclude big ticket items like cars and homes, behaved similarly to the overall CPI, increasing by 2.2 percent for the year. Chart 1 demonstrates that these measures do not always move in tandem, with considerably more volatility in the EPI over the past decade.
The Bureau of Labor Statistics’ measure of average hourly earnings increased by 2.7 percent for the year ending December 2017, meaning that on average according to these measures, Americans’ purchasing power increased last year. In fact, wages have grown by about 32 percent since March 2006 (when the BLS began collecting this data series) while the CPI has increased by 23 percent. Does this mean inflation isn’t a problem?
A Tax on Savers
When one looks with a wider historical lens, the effect of the government’s inflationary monetary policy on the dollar is staggering. The purchasing power of the dollar has fallen over 90 percent since 1925 (see Table 2 at the end of this article), with that trend accelerating greatly after the abandonment of the domestic gold standard in 1933 and the suspension of gold redeemability in 1971. These long-term trends essentially amount to a transfer of money from households who save over their lifetime to the government which receives seigniorage revenue from printing more money—basically a tax on saving. As AIER President Edward Stringham recently wrote about our founder E.C. Harwood’s efforts to sound the alarm on currency devaluation:
The more government inflates the money supply, the more that prices will eventually go up, and without inflation proof bonds, people who kept their money in the bank would gradually see the value of their deposits eaten away. This is not to mention the boom and bust associated with monetary disruption.
In addition, the government’s inflating of the currency may be reflected in more than simply consumer prices. During the period covered by Chart 1 (March 2006 through December 2017), while the CPI increased by 23 percent, the S&P 500 stock index increased by 106%. While there is some debate on the matter, many believe that this large increase reflects an asset bubble fueled by inflationary monetary policy rather than real increases in the value of corporate stocks.
Winners and Losers
The upward pressure on prices does not affect all goods and services equally. As Chart 2 shows, college tuition (257 percent increase since 2000), medical care (196 percent) and gasoline (extremely volatile, but an overall increase of 193 percent) have increased more than other categories since 2000. Housing (58 percent) and food (51 percent) have increased less, but outpaced the overall CPI (46 percent). Apparel (-6.3 percent) and cars (-2.5 percent) slightly decreased in price in real terms, and computers, as they are measured by the BLS, decreased in price almost 92 percent. The behavior of computer prices over time illustrates one of many problems in calculating the CPI: we obviously don’t spend 92 percent less when purchasing a computer today than in 2000, but we get a lot more for our money in terms of speed, portability and other capabilities. Adjusting for quality changes over time is one of the most difficult aspects of calculating price indices.
Table 1 provides price changes tracked by the BLS for a wider variety of expenditure categories, for both the past year and since 2000. While tobacco products top the list of largest increases since 2000, largely due to new taxes, four of the top ten largest increases are related to education, three are related to energy, and water and sewerage maintenance and healthcare round out the ten largest increases. At the bottom, electronics account for seven of the top ten largest decreases seen since 2000, highlighting the same issue discussed with computers above.
Table 2 provides a simple way to convert values from the past into their equivalent value today (or vice versa). To convert a value from a particular year to its 2017 equivalent, multiply the original price by the conversion factor, Multiplier A, shown in the table for the appropriate year. For instance, if you want to know whether the value of your house has kept pace with inflation, multiply the price of the house by the Multiplier A factor shown for the year you purchased it.
Example: A house was purchased in 1965 for $25,000. Adjusting for price inflation, this price in 2017 dollars is $25,000 x 7.7795 = $194,488. This is approximately how much the house would have to sell for today just to keep up with price inflation.
To convert 2017 dollars into past dollars, multiply today’s dollar amount by the conversion factor, Multiplier B, shown in the table for the appropriate year.
Example: If the price of a movie ticket is about $10 today, what was the constant-dollar equivalent in 1974? Today’s $10 price in 1974 dollars is $10 x 0.2012 = $2.01.