I have been looking at the BLS inflation records and have a question that probably can only be answered by informed opinion.
Here is one of many data sets showing inflation in the US:
while not the official BLS site, it uses (to more than appropriate number of digits) the BLS data and is easy to see.
Feel free to use any source of data you wish, my question applies equally to all.
How far back in time (i.e. what year) can one compare annual inflation rates? That is, in my opinion economic and social conditions in the 1930s ( for example) are so different from today that comparing the inflation rate in 2016 to the inflation rate in 1936 is pointless. I understand that money doesn’t change, and the price of a gallon of milk in 1936 was accurately measured. But a gallon of milk in 1936 is so different from a gallon of milk today that a price comparison is too misleading. I can’t think of anything that hasn’t changed incomparably in the last 50 years or so. By incomparably, I mean price comparably.
So, when looking at inflation trends, how far back should I look?
I personally don’t think one can compare inflation rates further back than the mid-sixties to inflation today.
And note that I am limiting the discussion to this one tiny measurement in the whole society.
It depends what you’re using inflation as a proxy measure for.
Trying to establish some sense of the perceived value at the time of any given product or sum of money, in relation to the values we have internalised today?
Trying to get some sense of scales of value at different points in time (where, for example, a car or a radio or a TV might be unimaginable at one point, and at another indispensible)?
If you mean, at what point can one say today’s perceptions of value became sufficiently commonly held for inflation to be a more or less consistently meaningful concept for the period since, well, that depends on what specific items of value you’re choosing. I do know our own (in the UK) Office of National Statistics is always dropping some items and adding others to the “shopping basket” it uses to measure inflation, but I can’t quite see why you say a gallon of milk is so different in 1936 (or 1836 for that matter), since basic foodstuffs seem to me to be a fairly consistent measure.
But you can measure these things in all sorts of different ways - e.g., how long would it take someone on the average income of the day to earn the money to pay for whatever it is.
While “economic and social conditions” are different, they contribute to what the inflation rate is for that time. They have nothing to do with comparing inflation rates over time.
As you said, the price of a gallon of milk(or gasoline–or a loaf of bread) are the only relevent things. I don’t see anything wrong with the historical numbers.
thanks for the comments so far.
I will try to clarify my question.
I am interested in comparing the change in inflation rates over time. For instance, In the last 10 years we have had consistently low and declining inflation. There are other periods of time when we have had low inflation and other times when we had declining inflation. How likely, by examining the past, is the current period of low inflation and declining inflation? In general, I want to find periods of time when inflation is following some trend, say sharply increasing or decreasing, and look at the historical record to try to identify similar trends so that I can guesstimate how likely that trend is.
As for why I think economic and social conditions change so much as to eventually invalidate comparisons, inflation is looking at one characteristic-price of a basket of commodities. The public’s perception of price changes over time. For instance, in periods of high inflation people view the current price of an item differently than during periods of low inflation. Oh look, the price of coffee is the same as yesterday-buy now while you can! And the price of an item is far more than the cost of the materials. Milk is a good example. Milk in the 30s (or pick any period in the past- the 20s or 60s whatever you accept as a period where my point on milk quality is valid if you do at all) milk was casually processed and casually shipped and stored compared to today. The cost of milk today includes a vast organization dedicated to carefully monitoring the health of each cow, controlling the temperature at each stage of production, etc. All were done to some extent in the 30s but are done far more today. As a result we are buying today not only a gallon of milk but a much reduced chance of getting sick. So while the price of a gallon of milk has gone up, it’s value to the consumer has also gone up. At the same time, dying in the 30s wasn’t the catastrophe it is today. Given that a single scratch could kill you, drinking less than perfect milk wasn’t that big a deal. A person in the 30s might not be interested in paying twice as much for a perfectly clean bottle of milk. So social conditions also influences prices. The same can be said for cars or airline seats or any number of things. At some point comparing milk to milk is like comparing apples to oranges.
Samclem makes a good point: "While “economic and social conditions” are different, they contribute to what the inflation rate is for that time. They have nothing to do with comparing inflation rates over time. ", but I disagree. Inflation is a matter of public confidence and the rate of social and technical change. If the quality of items is changing rapidly, the price will presumably reflect that. If people are expecting high inflation, they will increase the velocity of money. Etc. An economy in deflation (japan) is an extreme example of that.
At least that is how I see it. I am eager to hear the opinions of others.
There’s an issue with that if you go to the distant past that IMO is even more significant than the different basket of consumer goods or qualitative changes* in those goods.
Which is, where the monetary system and its management changes significantly. For example there was generally prevailing deflation in the US between the end of the Civil War and the end of the 19th century. The reason that doesn’t tell us anything about the likelihood the current low inflation environment will persist is because there was a different monetary system then, more like a constant supply of money, which in an age of strong productivity growth as that was, meant generally lower and lower overall price level. Today’s low inflation comes in an era of generally slowing productivity growth in a fiat money system with the central bank pretty rapidly expanding the supply of money. It’s a basically different monetary situation before considering that the basket of consumer goods has also changed.
Also I’m not sure I follow your logic even on the aspect of goods basket you are emphasizing. Assume statisticians can make reasonably accurate short term adjustments for changes in the basket of goods*. Then a 2% or 10% rise in the price level between 1926 and 1927 should create the same basic two different impressions on people as 2% or 10% would between 2016 and 2017. What people in 2016 think of the available goods vs. prevailing incomes 1926 compared to their own situation doesn’t directly enter into that, that I can see.
*which the BLS attempts to correct for BTW, ‘hedonic adjustment’. This comes into play in a major way for example with stuff like computers, where it’s clearly wrong to say a typical PC today which costs $1,000 represents zero inflation compared to 1 $1,000 computer from 30 yrs ago, the standard of performance, memory etc is way higher now for a mass market machine. This is a source of some controversy, and fodder for those claiming ‘inflation is much higher than the govt says’.
That chart you link to goes back to 1914. By that time milk was already well on the road to modern levels of purity through refrigeration, although pasteurization hadn’t become standard everywhere. Just a data point.
I agree that the CPI market basket is probably a poor indicator for historic comparisons. CPI probably works much better as a comparison to last year’s market basket, though. (Like a game of telephone: any two links in the chain are close even though the beginning and end may be far apart.)
I prefer median household income. For price comparisons it requires a higher multiplier for unadjusted numbers. For overall societal trends, the important line is inflation + tax-burden adjusted median income line, whch shows that growth has been slow ever since the 1980s. Declines appear in the major recessions of the late 70s and early 90s. Those are the true comparables to the current decline, albeit steeper.
Books and statistics pale in comparison to my own experience with inflation during my lifetime. From experience - In 1964 I was earning $5.20 an hour. Hershey bars were a nickel. I could buy 104 Hershey bars with one hour’s work.
Last week I bought a Hershey bar for $1.25 at CVS Pharmacy. (You might find them now for 75 cents or $1.10… whatever the market will bear.
Let’s consider my candy bar last week. It had gone up by 25 times. So, 25 x $5.20 = $130 - - I should be making $130 per hour if all remained equal.
Looking at it another way, I was bringing home about $180 a week after taxes in '64. Today I ought’a be bringing home around $4500 a week after taxes.
Some years ago, I bought a house. I lived in the house for about 10 years and I sold it for around 3 times what I paid for it. I hadn’t done anything to improve the house and it was much the same. I don’t consider that it was worth any more than it was when I bought it.
So what changed? Inflation. The money just wasn’t as much good when I sold the place. But I had to pay capital gains tax on the increased number of dollars. I paid capital gains tax on the inflation! But the money I realized from the sale of the house wouldn’t buy me 3 houses… or even one really NICE house. I could still afford only about the same home that I sold.
So yeah, you hear people say that wages have gone up and that compensates for the higher prices. Don’t believe it cause it ain’t so. I can tell you from my own experience and the school of hard knocks.
Inflation isn’t the increase in some prices, but in all prices, the price level. People who try to ‘prove’ with ‘school of hard knocks’ examples how inflation has really been a lot different than 2-3%* end up eventually realizing they’re wrong. Small differences in % pa really add up, ie even noticeable cumulative differences aren’t big % pa differences, and lots of big items have increased in line or lower than the overall rate. The ‘real’ number might not be the BLS exact number, there is actually no single number which applies to every consumer. And when you introduce a given person’s wages over time…that’s not what CPI is measuring. But it’s close enough for government work overall, as measure of the price level overall.
And the Fed’s preferred measure of inflation, the PCE, has tended to come out lower than the CPI. An argument can be made CPI slightly overstates inflation rather than understating it.
It’s true it’s an anomaly that nominal rather than real capital gains are taxed. But that’s one of the reasons cg’s are taxed at a lower rate than ordinary income, and there’s $250/$500k capital gain excemption in the US for sale of a primary residence by single/joint filers. But that is a strong argument against raising the cg rate to be the same as the ordinary income rate without having inflation indexing of gains. That would be a clear bias in favor of consumption over investment, in an economy that definitely doesn’t suffer from too much investment and not enough consumption as is.
*~3% compounded back to the start of the Federal Reserve system in the US in 1913, 2-something% in recent decades.
Thanks!
certainly milk might not have been the best example. However I think I got my point across. Perhaps there are better examples.
Your comment about CPI being a good measure of last year’s CPI is my question exactly. Using the CPI, how far back can one take the comparison before it begins not to be a good measure?
I appreciate the median household income graph. FWIW, it matches my income career quite well. I recently plotted my historical income from my social security records and used the SS multiplier factor that attempts to keep all dollars adjusted for inflation. My income rapidly rose in the early 80s, then plateaued until I retired. Pretty much what the median household income graph shows. I am not complaining, I made a good salary in the mid-80s and maintained it. I saved enough for retirement and we are good.
I understand your point-I went through the same period (started in the 70s though). However, as Cory EL pointed out, we really have to look at all our prices, not just the ones we remember. Look at gasoline for a counter-example. Or airline tickets. For those, we came out ahead. I don’t think the drops equalled the rises and almost all people are worse off now then they should be, but it doesn’t take $4500/week to live as well as you lived in 1964-unless you are living in Manhattan or Singapore…
Not only does the contents of the market basket change regularly, but adjustments are made for technological improvements as well. They understand the problem and try to compensate for it. Many people still argue that the efforts are not sufficient, resulting in fascinating nerd arguments that are arcane as quantum physics and need to be taken just as seriously.
The Dow is a meaningless pile of junk, comparatively. There are 30 companies in the Dow. The S&P 500 has 500. The Wilshire 5000 has… well, because of mergers it has 3600 and change. But you get the point. You might argue that 30 companies would be sufficient if they were the right 30 companies. But the Dow always replaces a company doing badly with a company doing well. That doesn’t always predict the future, but I know which way I’d bet. No real professional uses the Dow yet everybody knows it. Somehow that gives it psychological force. If people ever tell you the markets are rational, pull out the Dow and wave it in front of their faces.
I’m still trying to understand what the OP is trying to understand.
What is the OP’s goal here? To predict future inflation? To make statements about some supposed cyclic behavior? To simply learn the history for stamp-collecting? To try to define some concept of “normal” and “abnormal”? etc.?
I agree historical CPI measures and the Dow are a poor analogy since the Dow isn’t by today’s standards a rational index* and has been basically deliberately maintained as a relic whereas many flaws people imagine in long term CPI comparisons have been consciously addressed as far as they can be.
Also even the Dow is a fairly direct measure of a question you’d ask, not that it’s so profound or practical: what would $X invested 100 yrs ago be worth now? You might well have invested in the stocks of the Dow as a reasonably simply method 100 yrs ago, possibly you’d have kept doing it after it was more practical to invest in a broader index, or anyway you could splice the result between when you invested in the Dow stock by stock and when you shifted to an S&P 500 or total market index mutual fund later. At the end of the day stocks are about earning nominal dollars by investing, pretty simple.
‘The cost of living’ has more philosophical complication which sometimes comes out in people’s missives about why they think CPI comparisons over long periods are BS (if not ‘deliberately fudged by the govt’, but that’s a baseless accusation). They are focusing typically on particular prices or subjective judgments about the utility of old goods v. new goods. There’s also IME a bias where the origin of the axis is assumed to be people being richer and richer on average, as in common statements that ‘CPI must be flawed because we’re not better off now’ which is completely irrelevant to CPI itself. They aren’t really showing why the CPI isn’t the best objective measure of which amount of nominal $'s equates to the same subjective state of consumer satisfaction. It is again IMO close enough, and there’s a lack of methodologies which get an obviously better answer that’s significantly different.
*it made some sense to do it that way, Dow is a stock price not market capitalization weighted index besides having so few stocks, in the pre-computer era.
