Friday, March 1, 2013

Inflation and deflation have coexisted for 18 years

Inflation by almost any measure remains benign, in the range of 1-2% over the past year. But this relative tranquility masks huge shifts in relative prices: durable goods prices have been falling for the past 18 years, while the prices of services and non-durable goods have been rising. We live in a world where inflation and deflation appear to coexist. 

This first chart compares the year-over-year change in the headline and core (ex-food and energy) version of the Personal Consumption Deflator, which is generally considered to be a broader and more accurate measure of the prices paid by the great majority of consumers than the CPI (which is narrower and slow to change as consumption habits change). By either measure, inflation is within the Fed's target range. 

This next chart shows the level of the three main components of the Personal Consumption Deflator, starting from the end of 1994. I chose that date because that was the beginning of the only sustained period of decline of any component of the Personal Consumption Deflator on record, and as you can see, the durable goods component has been declining steadily every since. It is probably not a coincidence that 1994-95 marked the beginning of China's emergence as an economic and exporting powerhouse. China's dramatic growth, industrialization, and cheap labor have undoubtedly contributed significantly to the decline in durable goods prices over the past 18 years. The whole world is better off, because incomes have been rising significantly relative to the prices of durable goods. If you use the services sector price index as a proxy for wages, then wages have risen 126% relative to durable goods prices in the past 18 years. This is unprecedented.

Put another way, an hour's worth of work for the average person now buys more than twice as much in the way of durable goods. Billions of people now walk around with powerful computers in their pockets, linked to a global network that gives everyone access to just about all the information in the world, anytime, anyplace. This is prosperity and progress on a massive scale.

No wonder the debate rages over whether we suffer from too much or too little inflation. But in the end, it can't be a bad thing that wages continue to rise while computers, TVs, cameras, phones, etc., continue to fall, even as they become more and more powerful.


Gloeschi said...

That would be nice - if real incomes were increasing. But they are actually falling since 2000:

Public Library said...

Add commodities, real estate, and education prices to your chart. Your point is exactly why debating headline inflation (Benjamin) is a pointless exercise. It masks the Fed blown bubbles. Eventually the bubbles pop and cause damage to the real economy all the while inflation expectations are "well anchored".

William McKibbin said...

@Gloeschi, yes, real working wages have been stagnate or declining in the US since the late 1960's -- that's because working wages continue to regress to global norms, which is about $15/day without benefits -- said another way, that's all that labor is worth in the global economy -- on the other hand, those with world-class skills have seen their earnings climb exponentially -- in other words, surgeons, movie stars, and professional athletes are scarce commodities, and so their earnings continue to rise in the global economy -- bottom line, people with less than world-class skills are likely to see their working wages continue to decline indefinitely, or until the global population begins to decline for some reason -- in the meantime, people with world-class skills are earning premium wages that convert into wealth, equities, freedom, and pleasure on a scale that poor people (anyone earning less than $300,000 annually) cannot comprehend -- my advice to everyone is to acquire world-class skills via any means necessary and convert those wages into equities in order to avoid experiencing declines in standards of living -- life for the 99% crowd in the US is likely to get much harder as real working wages continue to regress to global norms -- that's life on Earth -- just ask anyone...

William McKibbin said...

PS: Follow the link below to see how real working wages have stagnated since the late 1960's.

Again, real working wages in the US have been regressing to global norms since the late 1960's -- that's life on Earth...

Benjamin said...


The charts shows inflation right now in retreat, headed for deflation---but we are still not yet back to pre-recession employment levels.

Scott Grannis used to talk about commodities a lot, about how they were a harbinger of USA inflation.

The latest commodity index from The Economist magazine shows commodities down 7 percent in the last year, in dollars.

The Reuters/Jefferies commodities index is down 9.59 percent in the last year.

Seems like nothing in prices is happening the way the economics profession said. They said if the Fed went to QE we would have hyperinflation.

Instead, as of now, we are in deflation.

Benjamin said...

Public Library: Please see post above. We are having deflation in commodities prices.