Monday, March 29, 2010

Dissecting inflation


This chart shows the rate of inflation according to the Personal Consumption Deflator (green line), as compared to two of its three components: services and durable goods. (The third component, nondurable goods, is for some reason not available to me at the moment.)

The next chart shows the behavior of the price indices for services and durable goods since they began to part ways in 1994 (prior to that they both moved only in an upward direction). This price divergence has now grown to sizeable proportions. Put it this way: over the past 16 years, the average price of services has risen almost 60%, while the average price of durable goods has fallen almost 25%. Service sector prices therefore have doubled relative to durable goods prices in just 16 years. You might say we have had a whole lot of inflation in the service sector which has been offset to a significant degree by a lot of deflation in the durable goods sector. That might explain why there is so much disagreement these days about how much inflation there is. It all depends on what sector of the economy you're talking about.

3 comments:

Gary said...

The price of things we import (from China, but elsewhere also) is going down because they substituted labor for capital. The US manufacturing sector is small, and in many cases (autos) is simply not economically viable without continuous taxpayer subsidy.

The price of services that we "make" here continues to go up. As more and more of our incomes are going to taxes, education and health care (a cost problem that remains unsolved and un-addressed by ObamaCare) -- this service sector is making up a larger and larger share of most people's budgets.

A refrigerator, made in China using a compressor built in South Korea, will last many years. But you have to pay for education, health care and taxes each and every year

The benefit of low inflation in manufactured items "compounds" once every 7-8 years; the inflation of services "compounds" at least once per year.

The government's statistics still give equal weighting to manufactured goods and services -- which is clearly wrong. The problem was "hidden" for years by dual incomes and home equity loans.

W.E. Heasley said...

Mr. Grannis:

“That might explain why there is so much disagreement these days about how much inflation there is. It all depends on what sector of the economy you're talking about.”

That statement is very true. Most services have become very expensive relative to many durable goods. We are also paying costs that are increasing at an increasing rate for government zero proudction services. Here are two observations:

(a) in the old Soviet Union the central planners refused to count services as part of GDP based on the notion that services did not produce anything. Hence the service sector in the former Soviet Union was so lacking that if a durable good needed repair service there was no one to fix the durable good. Hence the durable good was merely junked although a relatively simple repair would have extended the life of the durable good..

Today, a version of the phenomena has occurred in “servicing/repairing a durable good” within the U.S. economy. That is, you acquire a durable good yet its so expensive to fix some durable goods (service) that the replacement cost of the durable good is less than the cost of the service to maintain /repair the durable good or only marginally more expensive. Hence the durable good is junked when a relatively simple repair would have extended the life of the durable good

(b) governments do not produce anything they merely consume. When governments are not consuming then they merely act as a transfer agent. However, the cost of the government transfer agent process has become very expensive. When the average wage and benefit of the transfer agent (government) is much higher than the average wage and benefit of the private sector (sector generating the transfer payment) then a culture of overpaid transfer agents has been introduced. The transfer process produces nothing more than transferring income/wealth from X to Y. Hence we are paying ever increasing costs for zero production.

Benjamin said...

It is interesting that the cost of manufactureed goods is down, but military hardware costs more and more and more every year.

New aircarft carriers are $14 billion each. I remember when they were only $1 billion, in the late 1970s.

A clear example of a system operating for decades without brakes.