Also, I think it’s not the case that everything is just proportionally more expensive. Prices change in relation to one another and to the number of hours typically worked, and new goods get introduced. Paperback books are a good example – they represented a form of deflation when they were introduced in the 20th century, because some books were now available much more cheaply. The industrial revolution and mass production brought about huge deflation in the price of clothing and consumer goods. Advances in refrigeration, storage, and transport have brought about deflation in the price of food; even just in the last few decades, it’s become much easier to get out-of-season fruit from the Antipodes, for instance. These changes may not look like deflation, nominally, because the number on the price tag may still be going up, but they’re drops in prices relative to the hours one has to work to buy these things and to other goods and services that haven’t seen such advances.
Land values may always keep rising to some extent, because as the saying goes, they aren’t making any more of it. Even that’s not entirely true, though; advances in transportation can make it practical to open new areas of land to development, and building processes and materials can become cheaper through technological development as well.
Mrs Iggy doesn’t understand dollar pricing because it doesn’t relate well to her upbringing and everyday experience in her home country. She is accustomed to a relatively inflated currency.
She has a hard time understanding how I can buy all this for about 12 dollars. I have a hard time wrapping my head around the spending nearly 23000 pesos. They are roughly equivalent.
The advantage I see to dollar pricing is it makes big ticket items seem easier to deal with. I understand a house costing 300000 dollars. I start to lose track of the zeros when the house costs 565200000 pesos.
Inflation was invented in 1937 to give old people something to prattle on about.
I can’t wait until we replace “dollars” with “Benjamins” in colloquial speech, in the same way that “cents” are all but obsolete. “How much did that new iPhone set you back?” “37 Benjamins, I got it on sale.”
Deflation punishes borrowers and rewards lenders, inflation punishes lenders and rewards borrowers. Yes, you can fiddle with interest rates to make everything work correctly, but if the expected rates change then one party or the other has lost a significant amount of value. A way to handle this is variable rate loans–the interest rate changes based on an agreed upon prime rate. The problem with this is that your payments might go up significantly, but your income might not go up to match.
That’s the biggest problem with rapidly changing price levels, the unpredictability. You have to adjust prices regularly, you have to renegotiate your wages regularly, everything changes except things that don’t, and people are regularly getting screwed when their planning doesn’t match the actual outcome.
But you’re also right that deflation means that money stuffed under a mattress is earning an effective rate of return that might be better than you could get investing the money. And so people take money out of the economy and stuff it under the mattress, which reduces the supply of money which increases the value of money, which means more deflation. And with no investment the economy grinds to a halt.
We’re so used to the problem of inflation that we forget that deflation used to happen regularly when the government couldn’t just dump money into the economy. Money is a useful good, so it doesn’t make sense to endure a scarcity of money that crushes your economy when you can just make arbitrary amounts of it.
It’s just the numbers that have changed; for example, 50 years ago in 1963, a gallon of gas cost $0.49. Now it costs about $3.10 (where I live anyway).
So was gas cheaper in 1963? Not really. According to several sources, $1 in 1963 is roughly equal to $7.50 today, so that 49 cent gallon of gas would be worth $3.75 today, when inflation is accounted for.
It’s actually cheaper today, even though the numbers are different.
That’s why things like cost of living raises are important- they keep people’s wages and salaries from declining at the interest rate.
Short answer to the OP is “Yes.” Longer answer is “Yes, but not within the established economic framework.”
The concept is called décroissance. (Roughly, “de-growth.”) As it’s contrary to the 99% of economic theory that sees only growth as a possibility, it’s not likely to be implemented by choice. It will eventually be implemented by lack of any other options.
The biggest problem with rising prices is not knowing if it’s inflation or if we are getting screwed by greedy businesses.
My DirecTV bill is a good example. I have the plus package and two receivers. No premium movies channels. Had the identical service since 2007. Yet my bill goes up every single year. Greed or inflation?
Theres no way of knowing. Same thing with that burger, fries, and Coke I get during my weekday lunch break. It’s doubled in price since I started my career in 85. Greed or inflation?
There’s no benchmark to know when we’re getting taken advantage of. Theres no price point to compare against.
Food and consumer-goods manufacturers also conceal inflation by subtly shrinking the size of a standard package. Viz., Breyer’s ice cream shrinking from a half-gallon to 1.5 quarts.
Things cost what people will pay for them. If you think your bill for X luxury service is too high, then you need to find a new provider for X or cancel X altogether.
Don’t sit around and ponder if there is a formula to decide whether or not you are getting screwed, and see if there’s something “someone” can do about it. There isn’t.
I’m always amazed at people who think there is, or should be some correlation between the cost of producing something and the retail price that is charged.
The assumption seems to be a deconstruction of the “higher price = higher quality” conception of consumers, even though that’s not necessarily true, and neither is the assumption that “higher price = higher cost”, even if “higher price = higher quality” is true.
For example, it’s entirely possible that Joe’s Local Burger Shack can make a burger out of inferior ingredients and charge more for that burger than a large national chain does for a similar burger using higher quality ingredients.
Economies of scale stand out- if the large national chain is buying some specific higher-quality beef in quantities measured by the tens of tons, they’re likely getting a better price on that relative to Joe’s 75% lean “Ground beef” that he’s buying in quantities measured by the tens of pounds.
Let’s say that Joe’s shack works at a 10% margin (i.e. the cost of his ingredients, labor, etc… for a burger is 90% of the cost of the retail burger), and National burger chain is working at a 30% margin, and Joe’s burger is priced 40 cents more than National burger’s.
Joe is operating at smaller margins than the national chain, so he’s making less money, but he’s also charging more for a lower quality burger.
National burger chain is charging a lower price for a higher quality burger, but is making a higher profit margin.
Which is the ripoff? Why should we care? The market clearly bears a burger price that encompasses that 40 cent difference between the burgers, so there’s no real pressure for National Burger to drop their price, even if they do have higher margins.
It’s not like the prices you paid in 1985 were the gold-standard “fair” prices, and any change from that means you’re getting screwed. If it costs more to produce potatoes here in the future world of 2013, your french fries are going to cost more than they did in 1985. If beef is easier to produce then your hamburger is going to cost less. If sullen teenagers work for less money, the whole restaurant costs less to run. If gas is more expensive, it costs more to ship everything to the restaurant.
The funny thing is that 1985 is when we had just come out of the disastrous round of inflation of the 70s. That’s when prices were starting to stabilize. And you’re right, during the inflation it was very hard to tell if you were paying a “fair” price for an item because prices would go up every few months. Prices would sometimes lag behind the “fair” price and you could get a deal, or they would be raised past the “fair” price in anticipation of future inflation, and you would get a bad deal.
If you really want to compare prices between 1985 and 2013, you have to pretend that the dollar in 1985 is a foreign currency and apply an exchange rate. The US Bureau of Labor Statistics has a website that will do this for you: http://www.bls.gov/data/inflation_calculator.htm. Putting in your dates, we see that the exchange rate is 2.17, meaning, an item that cost a dollar in 1985 would cost you $2.17 in 2013.
So if a burger cost $1 in 1985 and now you pay $2, you’re getting a bargain compared to 1985, by 17 cents. And of course the economy has grown since then, so everyone has more money, so $2.17 is a smaller fraction of the US economy than $1 was in 1985. So even if you’re paying the same amount after inflation, you can afford it easier. On average. Of course median workers haven’t seen their real wages increase much, the real increase has been for the rich, the super-rich and especially the hyper-rich.
But again, the past is a foreign country. Like when you go to Mexico and you see bananas at a stall and you ask the guy how much they cost and he quotes you a price in pesos, and you calculate how much that would be in dollars, and find that the price is half what you pay at home, so it’s a really good deal. You buy a bunch and eat them happily. Except you got screwed because the price he quoted you is twice what he charges to the locals. How can it be that you got a bargain and he got a bargain at the same time? But this can easily happen because exchanges of goods and services are not zero-sum transactions. Both parties can come out ahead, even way ahead.
Another factor is that in a time of inflation it makes sense to buy now, since prices will be increasing. Since pay goes up in a stepwise fashion and the price of goods goes up more continuously, it makes sense to buy soon. In times of deflation it makes sense to wait to buy until the price comes down.
As for periods of deflation, the trope of the evil banker evicting the poor widow from her house so popular at the end of the 19th century came about because deflation made the poor widow’s mortgage payments unaffordable.
I don’t buy this. I can’t speak for 1963, because I wasn’t driving yet (I was only 3), but since I’ve been old enough to drive there’s been three things that I’ve always been aware of the going prices: gas, candy bars, and milk. From the time I was driving until I was in my 30s or so a gallon of gas was always a little over double the price of a candy bar and roughly half the price of a gallon of whole milk.
I now pay around a dollar for a candy bar in most grocery stores (less in some) and $4.00-$4.50 for milk. Based on that gas should be around $2.25.
That’s because food prices in general are a lot lower relative to the value of a dollar than they were in 1985. So it’s not that gas is more expensive after inflation, it’s actually that gas is a bit cheaper and milk and candy are a lot cheaper.
The relation 4 candy=2gas=1 milk that used to hold when you were a teenager no longer holds, candy and milk are cheaper. So now it’s more like 4 candy=1 gas=1 milk.
It’s really the derivative that matters. An increase in the rate of inflation rewards borrowers. A decrease in the rate of inflation rewards lenders (of fixed interest rate loans).
In addition, actual deflation (which is pretty rare) rewards lenders because you can’t adjust the value of printed currency. If we were using all-digital currency, deflation could be a stable economic system as well. Whatever institution you held your money in would take a small percentage regularly (reverse interest) and we’d have to introduce new smaller divisions of currency over time. People who lent you money would just expect to earn a negative interest rate on it. It’s sort of counter-intuitive, but it’s mathematically and economically fine.
Due to human psychology and the fact that currency is printed on stuff, rather than existing only as entries in a database, it makes sense to have a small but stable amount of inflation. Inflation means that there’s some incentive to invest and not just sit on currency. Stable means that people can make predictions about the future, which is good for investment. And inflation also helps reduce real wages over time which is much more palatable for people to accept than actual wage cuts (people are much happier getting small raises every year, even just keeping pace with inflation, and in bad times getting no raises than they are getting no raises with no inflation and in bad times getting pay cuts).
I was simply pointing out that based on inflation, that 50 cents in 1963 = $3.75 today with no reference to purchasing power.
Looking at relative prices is really misleading; the relationship you posit between candy bars, a gallon of milk, and a gallon of gas isn’t a fixed one.
You really need to look at the CPI and purchasing power indices to figure out what you’re looking for. By those measures, 49 cent 1963 gas was even more expensive than today.
Why is everyone talking about deflation? That’s not what the OP is suggesting. Deflation is when you have a dollar in your wallet that is worth X, and tomorrow it’s worth >X.
The OP is talking about rebasing. In that scenario, you have a dollar in your wallet that’s worth X. Tomorrow, you have a dollar that’s worth X, but also worth Y new dollars. You can trade it at any time for either X or Y. All electronic accounts, debts and credits, automatically change to Ys, which are good for buying anything in the national economy.
In deflation, your currency earns value over time. In rebasing, all else being equal, it never does.